Topics Risk Solutions 3/2015 - Munich Re

TOPICS RISK SOLUTIONS

Insurance solutions for industry Issue 3/2015

The calm after the hurricane Ten years after Katrina, everything is back to normal in New Orleans. Society and insurers alike have learned from the devastating catastrophe. PAGE 4

Rail traffic Product innovation for SBB

Speciality Magnificent head of hair becomes a risk

Natural hazards Learning from one loss for the next

EDITORIAL Dear Reader, Ten years ago, New Orleans was hit by Hurricane Katrina, one of the most devastating tropical cyclones ever, and a humanitarian catastrophe which claimed the lives of 1,000 of the city’s inhabitants. From today’s perspective, we need to ask: have we learned from this costly natural catastrophe – both as a society and as insurers? The first piece of good news is that the protective measures taken since Katrina have significantly reduced the flood risk in New Orleans; overall, the city is better prepared. The second is that since Katrina, insurers and insured companies have been working more closely together in estimating risk. And there is good news from elsewhere, too: a loss in Switzerland has also led to development of a new insurance solution. Together with our client, Swiss Federal Railways (SBB), and other leading insurance partners, we have created an insurance solution for railway companies that, to date, is unique. I wish you a stimulating read.

Torsten Jeworrek Member of the Board of Management and Chairman of the Reinsurance Committee NOT IF, BUT HOW

Contents The next storm is sure to come After a levee was breached, the old houses of the working-class district Lower Ninth Ward in New Orleans were swept away. First, art came back in the form of the Pink Project art installation. In 2007, the Make It Right Foundation, established by Brad Pitt, built 150 new houses in the district with better flood control measures.

Page 4 News2 NDBI Product innovation for railway companies 3 NATURAL HAZARDS USA Hurricane Katrina 4 In 2005, a hurricane and flooding laid waste to fun-loving New Orleans FLOODING Improved protection for New Orleans Structural measures are only part of the solution INSURANCE We offer more than just capacity Chief Underwriting Officer Beatrix Hartinger speaks on hazard analyses, prevention and risk-adequate pricing SPECIALITY Hands, feet, hair Jonathan Thomas explains how body parts can be insured

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COLUMN Loss mitigation by learning from past losses What has Katrina taught us?

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Imprint and preview

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Munich Re Topics Risk Solutions 3/2015

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NEWS

PRECISION TECHNOLOGY

ROAD TO PARIS

2015 – A crucial year for climate change For many years now, the world has been preparing for the 21st United Nations Climate Change Conference (COP21) which is in Paris this year. Achieving a binding agreement on the reduction of carbon emissions to prevent global warming from exceeding 2 °C would be a major success for all 195 member states of the United Nations Framework Convention on Climate Change (UNFCCC). This would mean limiting global carbon dioxide emissions to 1,000 Gt (gigatonnes) of CO2 by 2050. At the G7 Summit in Elmau in early June, the leaders of the G7 agreed to significantly intensify climate protection measures. This increases the chances that the UN Climate Conference in Paris COP21 at the end of 2015 will reach an effective agreement on climate change.

HSB follows farmers into the field Access to insurance coverage against the negative impact of climate change in developing countries is to be extended significantly, and access to renewable energy is to be accelerated. The envisaged expansion of climate insurance solutions in developing countries will motivate many privatesector risk carriers to design new cover concepts and cooperate with new client groups in the public and private sectors of these countries. This will especially benefit lowincome regions, which will thus gain access to contractually agreed financial transfer payments following weather catastrophes and thus become less dependent on (unreliable) aid money. >> More information at www.munichre.com/road-to-paris

Follow us on social media You can also contact Munich Re on different social media platforms: we are on Twitter, Facebook, Google+, YouTube, LinkedIn and Xing. Why not follow us and keep up with the topics that are being talked about in the insurance industry? Check out our extensive range of interesting articles and fascinating videos.

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Or stay fully up-to-date with live tweets from company and industry events. >> twitter.com/munichre >> facebook.com/munichre >> youtube.com/user/munichrevideo >> linkedin.com/company/munich-re >> xing.com/companies/munichre >> plus.google.com/ 115897201513788995727


New farm equipment and machinery breakdown coverage offers expanded insurance for mobile implements and the precision electronics that control them, among other enhancements. The optional insurance for mobile farm implements such as seeders, spreaders, sprayers, tillers, and their controlling electronics addresses, for the first time, a major gap that has existed in farmowners insurance. No policy has been available until now that covers both breakdowns to portable agricultural implements and undetectable damage to sensitive microcircuits or firmware failure. The coverage will be available through farm insurers that partner with Hartford Steam Boiler. >> M ore information at www.munichre.com/HSB

NEW COVERAGE CONCEPT FOR RAIL TRAFFIC

When the trains stop running In June 2012, a landslide hit the railway lines near Gurtnellen in Switzerland. Although the property damage was limited, the business interruption caused Swiss Federal Railways (SBB) additional costs of just under 20 million francs. The entire financial loss was indemnified through SBB’s property insurance only because of the property damage caused to the tracks. The risk managers at SBB realised that, without the property damage, the rockslide would not have triggered an insurance payout, even though significant extra costs would have still arisen. Risks not involving property damage are highly diverse in nature, with IT and increasing digitalisation being the main sources of risk for so-called NDBI (non-damage business interruption) losses. As the most important mobility service provider in Switzerland, SBB runs one of the densest and most heavily-used rail networks in the world. SBB can only achieve further growth by further intensifying its operations, which is only possible through the consistent changeover to digitalised train control systems. If these were to fail, individual high-traffic sections or even the entire country could be brought to a standstill for quite a long period of time. Besides the risks from IT, SBB was therefore looking for an insurance solution that would cover all the losses arising from any business interruption, irrespective

of the cause. Within Corporate Insurance Partner, a “deal team” worked together with SBB to identify and evaluate possible loss scenarios, as well as their likelihood of occurrence and their financial impact. Following an international tender, Munich Re and two other risk carriers from the insurance industry were awarded the contract. We are drawing on the experience gained from this project to develop comparable solutions for other railway companies and corporate clients.

OUR EXPERTS Nils Diekmann Senior Underwriter [email protected]

Christian Höft Risk Analyst [email protected]


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NATURAL HAZARDS USA

Katrina’s legacy The 2005 Atlantic hurricane season had already been exceptional by the time the twelfth tropical depression of the year formed over the central Bahamas on 23 August. But in less than a week, Tropical Depression Twelve would prove exceptional in its own right, becoming one of the most powerful tropical cyclones ever observed in the Atlantic and one of the most devastating catastrophes in US history: Hurricane Katrina

Mark Bove

After its upgrade to tropical storm status, Katrina slowly moved westward through the Bahamas and continued to intensify as it approached the Florida peninsula. Katrina attained hurricane status just two hours before making landfall between the cities of Miami and Fort Lauderdale on 25 August. Katrina battered South Florida with sustained winds of 130 km/h (80 mph), causing minor damage to buildings and widespread power outages. After passing over MiamiDade County, Katrina weakened back to tropical storm intensity before it emerged into the Gulf of Mexico on 26 August. Back over open water, Katrina steadily strengthened, quickly regaining hurricane status as it passed to the north of the Florida Keys. As the storm moved over the central Gulf of Mexico, it passed over an anomalously warm Loop Current, with sea surface temperatures 1–2 °C (2–4 °F) above the long-term average.

Left: Tuesday, August 30, 2005 – Gulfport Casino District shows heavy damage the morning after Hurricane Katrina. Right: Sunday, August 22, 2010 – Gulfport Casino District five years after Hurricane Katrina.


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NATURAL HAZARDS USA

A combo picture shows a man swimming by the Circle Food Store with the skyline in the background in flooded New Orleans on 30 August 2005 (top), and the same scene two years later (bottom) on 23 August 2007.

This unusually warm water contributed to Katrina’s rapid intensification. It ultimately reached category 5 strength on 28 August with sustained winds of 280 km/h (175 mph). During this time, the storm’s wind field also expanded dramatically, with hurricane force winds extending up to 160 km (100 miles) away from its eye. Fortunately, Katrina weakened to a category 3 storm with sustained winds of 200 km/h (125 mph) before making landfall in southeastern Louisiana on the morning of 29 August. Heading due north, Katrina passed about 40 km (24 miles) east of New Orleans, then briefly passed back over the Gulf of Mexico before making a final landfall near the Louisiana-Mississippi border. Despite weakening, Katrina still caused extensive wind damage along the northern Gulf Coast, and continued to cause significant amounts of wind damage over 200 km (120 miles) inland.

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The storm surge However, it was Katrina’s massive storm surge that truly devastated the northern Gulf Coast. Unlike Katrina’s winds, its storm surge did not have enough time to subside before landfall, allowing for a surge event far more severe than the storm’s landfall intensity would otherwise suggest. Surge heights ex ceeded 9 metres (30 feet) in southeastern Louisiana and along the coast, back bays and bayous of Mississippi, damaging or destroying almost everything in their path. Lesser surge heights extended eastward to Alabama and the Florida Panhandle, and in all affected over 320 km (200 miles) of coastline.

NATURAL HAZARDS USA For the city of New Orleans, Katrina’s passage was only the beginning of a much larger catastrophe. Bounded by the Mississippi River to the south and by Lake Pontchartrain to the north, New Orleans lies partially below sea level, and is surrounded by a complex network of levees to protect against flooding, and pumping stations that remove excess groundwater. In the days leading up to Katrina’s landfall, mandatory evacuations were ordered for the city, as there were concerns that the levee system could fail during such a powerful storm. However, many residents did not have the financial means to leave the city, while others ignored the warnings and remained anyway. Unfortunately, the dire warnings proved accurate, as Katrina’s surge proved too much for the city’s flood defences to handle. Some levees were overtopped and several others were breached, while power out ages knocked the pumps offline. With its defences breached, the “bowl” of New Orleans slowly filled up with water from Lake Pontchartrain and the Mississippi River-Gulf Outlet (MRGO) Canal. In some low-lying areas, the flood depths exceeded 5 metres (15 feet). And since New Orleans is below sea level, the stagnant flood waters covered the city for weeks until the pumps were brought back online to drain the city. What remained in the aftermath was a city covered in pollutants and sewage, and building interiors covered in toxic moulds. In all, over 200,000 homes and businesses in the city suffered some level of flooding. Loss of life and property

The magnitude of losses from Katrina, as well as the aggregate losses resulting from 12 landfalling storms during the 2004 and 2005 seasons, also dramatically altered the landscape of insurance in hurricane- exposed states. Many insurance companies reacted to the volume and frequency of the losses by reducing exposures in hurricane states, particularly along the immediate coast, causing an increase in coastal risks borne by state-owned residual insurers. And in areas where Katrina’s high winds and storm surge both caused damage, lawsuits emerged around loss causation and coverage in residential policies. As with all major natural catastrophes, there were – and still are – many lessons to be learned from Hurricane Katrina. How has Katrina altered our under standing of how tropical cyclones may respond to a changing climate? What have we learned regarding flood defences in the United States? How did Katrina change hurricane loss models? What types of insur ance coverage issues did Katrina reveal? And what would losses from this event look like if it recurred today? The legacy of Katrina is still felt today. To mark the tenth anniversary of this extraordinary event, in our magazine Topics Schadenspiegel 1/2015 we take a look back and explore in even greater detail key aspects which, to this day, have lost none of their impact. >> M ore information at www.munichre.com/publications

Only the humanitarian tragedy of the New Orleans flood exceeded the physical damage to the city. Over 1,000 residents who stayed in New Orleans drowned in the flood or died from exposure or lack of food and water. Many other residents who did not leave the city sheltered at the Superdome, but conditions in the stadium rapidly deteriorated in the days after the storm and it became a crisis in its own right. Many of those evacuated never returned to New Orleans. To this day, the population of New Orleans has yet to return to pre-Katrina levels. In all, Katrina is estimated to have caused US$ 125bn in overall damage, of which about US$ 60bn was insured by private and government entities (all values in 2005 dollars). Katrina’s insured loss remains the largest loss caused by a natural catatrophe in history, in terms of original dollars, and only the 2011 Japan earthquake and tsunami have caused more overall damage. Fortunately, despite over 1.7 million claims filed and over US$ 40bn in privately insured property losses, only one insurance company went insolvent after Katrina. The National Flood Insurance Program (NFIP), which covered most of the remaining insured loss, did not fare as well, however, as US$ 15bn in claims sent the federal programme deep into debt, triggering calls for the privatisation of flood insurance in the United States.

OUR EXPERT Mark Bove, a meteorologist in Underwriting Services/Risk Accumulation at Munich Reinsurance America, Inc., specialises in modelling natural catastrophe risks in the USA. [email protected]


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FLOOD

Great progress in flood control Hurricane Katrina struck the Louisiana and Mississippi coast with devastation never before seen. The storm was a shock to American society – but also to the whole world. The protective measures taken since Katrina have significantly reduced the flood risk in New Orleans.

Wolfgang Kron

A hurricane landfall on the US Gulf Coast is not a rare event. A direct hit on New Orleans is. The area was highly vulnerable to flooding, even from moderate storms, and exposed to a high likelihood of loss of life and property. Any event with a return period less frequent than once in 50 years could produce significant consequences. The city’s existing hurricane protection system had not been completed, due to a lack of funding, and was in any case designed on the basis of outdated criteria (IPET, 2009). Experts were aware that a disaster could happen. An article in the journal Civil Engineering (Brouwer, 2003) described in con siderable detail how a hurricane could cripple New Orleans and how this could be prevented.

An emergency exercise had even been conducted using as its centrepiece a hypothetical hurricane, Pam – a storm roughly equal to Katrina in intensity. Yet neither society as a whole nor local communities were genuinely concerned. Katrina’s impact Hurricane Katrina swirled over the open ocean as a category 5 hurricane. Its size and wind field were that of a monster storm. It created a huge wind set-up in the water level long before it reached land. The water level rose by up to 7 metres along the east side of New Orleans and up to 9 metres along the coast of Mississippi.

Fig. 1: The risk process Natural hazard

x

System performance = Flooding hazard Flooding hazard

Surge and wave levels estimated at 138 locations

Performance of entire 350-mile flood protection system

From 76 possible hurricanes

1) Pre-Katrina 2) Since 2011

Representing meteorological events with return periods between 30 and 10,000 years

138 reaches, >350 features and transitions

Risk assessment framework used in the IPET analysis of New Orleans Source: Munich Re, based on IPET 2009

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x

Consequences

=

Risk

Probability and intensity (depth) of flooding

Potential loss of life vs. flood depth

Expected annual loss of life

Pre-Katrina and new protection systems

Potential property damage vs. flood depth

Expected annual economic loss

With and without pumping

Based on pre-Katrina (2005) population and property values

FLOOD

The 2.9-km-long Inner Harbor Navigation Canal surge barrier reduces the risk of storm surge coming from Lake Borgne and the Gulf of Mexico.

It was the largest storm surge ever recorded in North America. A 200-km stretch of coastline was devas tated by strong winds and flooding. In New Orleans, located west of the landfall point, the wind was not the main damaging factor, but rather the flooding. The city, which is virtually surrounded by water, was not equipped with sufficient flood protection to cope with the high surge level. The system failed, and dykes and flood walls east of New Orleans and along the numerous canals leading into the city were breached at more than 50 locations. The “bathtub” in which New Orleans is located was filled and re mained flooded for over a month. This eventually led to a depopulation of large parts of the city, which to this day has yet to recover, ten years after the event.

In order to understand what happened during Katrina and why, an Interagency Performance Evaluation Task Force (IPET) was established in October 2005. The objective of this engineering investigation team, led by University of Maryland civil engineering professor Dr. Lewis E. Link, was to learn from Katrina and apply those lessons to the repair and rebuilding of the storm-damage-reduction structures in and around New Orleans. The work accomplished was reviewed by both the American Society of Civil Engineers and the National Research Council (NRC) and has been reported on in a comprehensive nine-volume analysis (IPET, 2007–2009).

The reaction

The IPET report describes the risk from hurricaneinduced flooding faced by New Orleans prior to Katrina, and the risk after completion (in 2011) of the new 100-year Hurricane and Storm Damage Risk Reduction System (HSDRRS). The report provides inundation depth maps that show storm intensities (flood depths for different return periods) and the impact of different pumping capabilities, as well as the expected risk of fatalities and property damage for the pre-Katrina and 2011 conditions.

Something had gone wrong, that much was painfully clear. And it was definitely not solely the – admittedly unprecedented – storm surge that determined the extent of the disaster. The failure of certain components of the flood protection system – some too low, some poorly designed, maintained and/or constructed – allowed the water to enter the city. Although the first failures were the physical flood defence structures, the full magnitude of the disaster reflected the failure of organisational structures as well. At least 1,118 deaths were recorded in Louisiana, the vast majority of which occurred in Greater New Orleans. New Orleans alone suffered direct property damage of US$ 30bn. The US Army Corps of Engineers (USACE), which is in charge of hydraulic and protection works along the coasts and large rivers such as the Mississippi, was blamed for the failure, in some ways justifiably so, but in others not. Applications to obtain funds for detected flaws had been denied or postponed for many years due to budget constraints. On a national level, the 9/11 attacks had focused fears of possible hazards on terrorism rather than nature.

A comprehensive risk analysis

Perhaps the most critical information for any individ ual or organisation living in a flood-prone area is how often and how deep flooding can be expected. Associated with this is the expected level of loss of life or property, i.e. the risk. The IPET analysis in New Orleans was a prototype approach aimed at providing a new and enhanced level of this information for large geographical areas. As a result, no other coastal region in the US has similarly comprehensive risk information.


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FLOOD With 350 miles of structures, a complex coastal environment, significant areas at or below sea level and large and diverse areas of residential, commercial and industrial assets, the New Orleans region represents a major challenge for assessing risk. Despite the sophisticated methods used, this complexity places limitations on the results. They should, due to their still significant uncertainties, be viewed as relative quantities. For example, an estimate of losses for the 100-year flood event should not be used as a forecast. Rather, it is a measure of the potential for losses.

The fate of New Orleans in the event of a 100-year flood depends on the performance of the system, which in turn depends on its ability to handle the water levels that hurricanes (the natural hazard) place on the system. It is a common misconception that a 100-year meteorological event creates a 100-year flood. There are many influencing quantities in transferring a storm to a flood, from meteorological and geographical factors to the performance of the system. All these aspects were accounted for in the IPET study.

Structures alone are not enough Munich Re’s flood expert Wolfgang Kron spoke with Lewis E. Link, Senior Research Engineer and Research Professor in the Department of Civil and Environmental Engineering at the University of Maryland, who chaired the IPET Task Force.

Lewis E. Link chaired the Post-Katrina Task Force IPET.

Wolfgang Kron: The Katrina disaster triggered flood-proofing of New Orleans. Is the city safe now? Lewis E. Link: The risk of losses has been reduced drastically, but significant residual risk remains. No city by the sea can be called safe given our future climate challenges. The HSDRRS* is a very substantial base for continuing to reduce risk into the future. Was the risk analysis something new? Risk-based design has been around for many years, but was not a routine approach to analysis of natural flood hazard mitigation, especially for such a large geographical and complex infrastructure system. This was definitely an unprecedented analysis at that time. Were the structures built on the basis of the risk analysis? The risk analysis provided a new level of sophistication regarding the

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hazard and greatly informed the design. Rather than use the statistically most likely surge and wave levels for the design criteria, for example a 100-year flood scenario, 90th percentile values were used to incorporate the inherent uncertainty. In addition, Monte Carlo analyses were conducted to determine the structure elevations that would be necessary to prevent excessive overtopping. Supplemental reinforcement of backs of the dykes is being considered to further prevent breaching from extreme events. The expected loss figures in the IPET are based, for comparability, on the situation in 2005, before Katrina struck. What are the figures now and what will they be in future? The combination of the HSDRRS and planned armouring dramatically reduces risk of loss of life and property. The residual risk, especially in economic terms, remains significant due to the potential for extreme events and the uncertainty of the impact of climate. The State of Loui-


siana is funding a regional initiative to restore ecosystems and reduce risk for coastal Louisiana, which will improve the situation. New Orleans is often cited as a model of the effects of rising sea levels. What are the consequences of climate change for the city? While the HSDRRS considered sea level rise and subsidence, it will not be enough in the long term. Until New Orleans changes the way it manages water internally, it is doomed to continue sinking. This, coupled with the ongoing loss of surrounding wetlands, means risk will steadily increase for the city. Is the 2012 havoc wrought by Sandy in New York comparable to the 2005 New Orleans disaster? The direct property losses were almost identical, but fortunately loss of life was much lower in New York. This was to a large extent due to the positive elevations in the area and the lower water levels caused by

FLOOD The team took the whole range of possible hurricanes and the water levels (surge and waves) that these hurricanes may generate at many different locations, and applied this to the system to see how it performed (with respect to its design and reliability), and to estimate how much flooding could occur at different levels of probability. From the 152 hypothetical hurricanes used for deriving the hazard distribution, 76 were chosen to define surge and wave conditions for the actual risk analysis computations. It is only through viewing all of these scenarios that the big picture of the risk situation for New Orleans becomes evident.

Sandy. But the lack of preparation was perhaps even greater in New York and New Jersey, due to longterm and widespread development in flood-prone areas. How can New York be made more resilient? Structures alone are not enough. Major storm surge barriers can help protect New York Harbor, but may seriously increase the surge levels in areas outside of and adjacent to the barriers. It will take a package of measures, including land-use management and nature-based measures. Are there other hotspots in the US that might face similar disasters to those in New Orleans and New York? Unfortunately, yes. Miami, Tampa Bay, Boston, Baltimore and Los Angeles are among the world’s top 20 cities for flood risk. Houston’s risk is also increasing rapidly as the sea level rises. Can we safeguard cities completely with flood protection systems? Never. But we can create resilient cities. Structural reinforcement is necessary when you are dealing with a densely populated urban area, but not sufficient. We have to change our mentality completely, learn to live with the water and embrace natural systems as a means of enhancing our well-being and reducing risk.

New Orleans today The Hurricane and Storm Damage Risk Reduction System in existence since 2011 has dramatically reduced vulnerability to flooding for most of the New Orleans region. Higher and stronger dykes and flood walls were established over the entire area, and gates and temporary pumps installed at the ends of the outfall canals. In particular, pumping has been designed to reduce flood depths in 100- and 500-year flood situations significantly, in turn reducing losses and the threat to people. A 100-year flood event is generally the result of heavy rainfall, not overtopping or breaching from a hurricane surge. But because this system was designed conservatively to include the uncertainty in the 100-year surge and wave levels, it would also significantly reduce probability of severe flooding even in events with up to a 500-year return interval. The IPET analysis considered two different pumping levels, 50% and 100% of ideal pump capacities. Since the performance of the pumping system is limited by the drainage systems that convey water to the pumps, the 50% value is closer to what is practical in real conditions. While some areas could still experience significant flooding and losses, the situation now represents the best structural risk mitigation status New Orleans has ever had. Given similar evacuation conditions to those seen in Katrina, the 2011 system is expected to reduce potential loss of life by as much as 86% without pumping and up to 97% with 50% pumping for a 100-year flood event. It also markedly reduces potential for loss of life from a 500-year flood event (98%). Given the same property distribution and values that existed prior to Katrina, it would reduce direct property damage by 90% for a 100-year flood event and by 75% for a 500-year flood event with 50% pumping, compared to the pre-Katrina situation without pumping. It must be stressed that the loss reduction (Fig. 2) is based on the population and value distributions in 2005 before Katrina struck. Further studies are under way to achieve an up-to-date risk assessment based on current figures, with fewer people and lower values, and future scenarios, with a probable increase in both parameters (see interview on page 10). It is also important to note that New Orleans is not the only risk hotspot. A large proportion of losses in 2005 – especially the insured losses – occurred along the coast east of New Orleans, for example in the casino and hotel areas of Biloxi, Mississippi. The whole coastline should therefore be in focus, not only New Orleans. >> M ore information at www.munichre.com/publications

* Hurricane

and Storm Damage Risk Reduction System


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FLOOD Fig. 2: Level of expected property losses in New Orleans Pre-Katrina HPS (2005) < 10% 10 – 30% 30 – 50% 50 – 70% 70 – 90% >90%

100-yr.

500-yr.

100-yr.

500-yr.

HSDRRS (2011) 50-yr.

Relative property loss for different return periods of flooding at 50% pumping capacity in 2005 pre-Katrina conditions with the Hurricane Protection System (HPS), comopared to today’s situation with the Hurricane and Storm Dam-

age Risk Reduction System (HSDRRS) in place. Coloured areas reflect the different drainage basins within the city. Source: Munich Re, based on IPET 2009

OUR EXPERT

Conclusion

Wolfgang Kron is a hydraulic engineer and Senior Consultant in Geo Risks Research, and responsible, among other issues, for floods and storm surges. [email protected]

You can never achieve 100% risk reduction no matter how large you make the dykes or flood walls. It is therefore imperative that structural improvements be coupled with additional non-structural measures in order to help reduce the risk further. These may include more effective evacuation or emergency responses to reduce people’s exposure to flooding, and flood-proofing, compartmentalisation or land-use zoning to reduce property damage. The key question is: what is the extent of losses that a flood would generate? If both depth and losses remain relatively small, the system in place is suffi cient. If either is large, additional measures are needed. The results of the IPET studies, especially the risk analysis and assessment tools, will be an effective platform for better policy and planning decisions aimed at hurricane risk reduction.

References: Brouwer, G. (2003): The Creeping Storm. Civil Engineering, June 2003, 46-88 IPET (2007-2009): Performance Evaluation of the New Orleans and Southeast Louisiana Hurricane Protection System. Final Report of the Interagency Performance Evaluation Task Force, Volumes I-IX, March 2007 to June 2009 IPET (2009): A General Description of Vulnerability to Flooding and Risk for New Orleans and Vicinity: Past, Present, and Future. Supplemental Report of the Interagency Performance Evaluation Task Force, June 2009 (https://IPET.wes.army.mil)

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INSURANCE

We offer more than just products and insurance solutions The devastation that Hurricane Katrina caused on the northern Gulf coast in 2005 changed the insurance industry. Beatrix Hartinger, who has been in charge of the global property business as Chief Underwriting Officer in Corporate Insurance Partners since 2015, sees not only technical underwriting, but also service to the client as the basis for lasting client relationships.

Topics Risk Solutions: Ms. Hartinger, what was your personal experience of the catastrophe in New Orleans? Beatrix Hartinger: In 2005 I was living and working in Chicago. Through the US media, I followed the dramatic events in the five states hit by the hurricane much more closely than would have been possible in Germany. Above all the plight of the people there, which just kept getting worse from day to day, deeply affected me. The human suffering and helplessness in the face of that terrible natural catastrophe … we can’t allow anything like that to ever happen again. Katrina also churned up the insurance landscape. Yes, quite radically. In terms of insured loss, Katrina remains the most expensive natural catastrophe of all time. Handling the claims was often a very complex matter. Coverage issues, such as differentiating between flood and storm, and the subsequent plundering, confronted many insurers, brokers and clients with enormous challenges. Quite a number of claims were settled in court. In addition, many insurers reduced their exposure along the coast as a result of the severe hurricane season in 2005. We at Munich Re also had to review our assessment of the region.

What has changed since then? We have done our homework on the insurance side of things: we have reworked our natural hazard and individual risk models, and we have improved the accumulation scenarios and the related overall exposures, and learned from the claims and their effects on our insurance coverage. Today our knowledge here is at a very granular level. What do you mean by that in real terms? The way we assess exposure to natural hazards has changed decidedly since 2005. Today we are in a position to analyse even several thousand locations belonging to one client at geocoordinate level, with the aid of tools. We evaluate every single client venue reported to us as to its insured risks. The way we control our natural hazard accumulation has also improved significantly. Today we monitor this precisely using geocoordinates, which enables us to recognise liability peaks and supports us early on in our portfolio management work.

At some venues, an on-site inspection together with our colleagues from HSB and our service unit LCE (Loss Control Engineering) can follow. There too, we cover all the risks: fire, explosion, storm, and more and more flood analysis as well. Right then and there, on site, we not only record information and risk circumstances for our underwriting people, we also recommend effective preventative measures for the venue. What does this mean for our clients? We clear up the coverage issues more in a dialogue with the client. The goal is to adapt the extent of cover to the client’s specific need, and to clarify the wording in advance in order to prevent misunderstandings in the event of a subsequent claim. Insurers and insured companies have been working more closely together in estimating risk since Katrina. That is something positive that has come out of that disaster. Contact: [email protected]

When analysing single risks, this means that we assess them better and can price them more fairly and individually. And the more exact analyses also help us in our dialogue with the client. We discuss identified risks and dangers, as well as our assessment and valuation, with our business partners.


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SPECIALITY

Not just for stars and starlets Covers for body parts have been a highprofile niche business since the rise of the movie industry. But there is a great deal more to body-part insurance than media hype. Considerable experience is called for, as Jonathan Thomas of Watkins Syndicate explains.

Much talked-about early examples of body-parts covers included insurance for actor Jimmy Durante’s hallmark large nose and, in the 1940s, a US$ 1m cover for actress and pin-up girl Betty Grable’s shapely legs – which became known as her “million-dollar legs”. Today, covers range from at-risk body parts of professional athletes, like footballers’ feet, to a male fashion model’s chest hair.

Former American football star Troy Polamalu’s shampoo sponsor had his 90-cm-long hair insured for a million dollars. Why? Because the opposition kept trying to pull the Pittsburgh Steelers defender down by his locks.

Underwriting body parts demands the ability to think laterally and extrapolate, coupled with the discipline to turn down unfavourable risks. Jonathan Thomas, Head of Speciality on the Watkins Syndicate at Lloyd’s, spoke with Topics Risk Solutions about this fascinating underwriting challenge. How did Lloyd’s get involved in this type of insurance? The first requests for insurance on body parts came from the entertainment industry, which is of course centred in California. Lloyd’s had made an excellent name for itself with swift and straightforward settlements in the aftermath of the San Francisco earthquake, so it was the first port of call for movie actors. The cover calls for a detailed approach and the corporate flexibility to innovate and extrapolate from what already exists.

In many of these cases, the risk cohort must be tiny. How can you possibly calculate something as obscure as chest hair? Well, you don’t have a cohort specific to chest hair. What you do have is a cohort specific to a range of bodyparts coverages coupled with an extraordinary level of underwriting flexibility, within a management structure that allows you to extrapolate and contingency load for areas where information is insufficient. Lloyd’s syndicates are particularly suited to offering that climate of opportunity. That applies to specialty covers for professional athletes too. When a sportsperson with a recurring injury buys accident and health insurance, many underwriters will exclude the injured part.


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SPECIALITY

Also worth insuring: US singer Mariah Carey’s legs

What are the main challenges in insuring body parts?

When they come to us, we sometimes design special covers and “buy back” parts of the excluded risk. Years ago, I had a request for an exclusion buyback policy on a football player’s patella tendon. It had been partially torn and the primary insurer had shied away from including it. I was able to take failure rates of patella tendons used in operations to replace the anterior cruciate ligament in order to get a realistic picture of how it could be expected to stand up over time. I’ve worked at Lloyd’s for 30-odd years, and over that time many people I’ve worked with have contributed to a kind of lateral thinking that looks at things in an innovative way rather than in the top-down prescriptive manner.

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Defining the body part can be a challenge. You have to decide exactly what language to put in the policy. It‘s a meeting of minds between the insured and the underwriter. In terms of sports disabilities, head injuries and concussions are an emerging challenge. The recent settlement in the US for American football players who sustained head injuries playing in the NFL has lowered tolerances and triggered a knock-on effect in other sports. I expect to see more and more specialised underwriting approaches develop in this area in coming years, partly due to this landmark settlement but also because of the major medical advances in testing for concussion. Could you describe the target group? The people who approach us about body-parts insurance tend to fall into three categories. There are those who think they need a policy but actually don’t. Take, for example, a surgeon wanting to insure his hands. Now, I would say he should take out a more comprehensive form of disability insurance, because any number of impairments – say, losing his eyesight – could be just as careerending or limiting.

SPECIALITY

The second group would be people looking not so much for a policy but rather for a media opportunity. They’re fine, because we can design a cover that has legitimate risk transfer coupled with interesting details that will attract media attention. I developed a facial hair cover for a man with a prominent moustache that stipulated it had to be groomed exclusively by professionals who had passed the tonsorial examination according to the standards of the Barbers’ Association of America. The third category is made up of professionals who really need to insure a given body part. These include hand models, foot models and wine tasters or perfumiers whose livelihood depends on their noses. And of course professional athletes, who come to us for exclusion buyback policies.

What’s the strangest thing you’ve ever been asked to insure? There have been so many odd requests, a lot of which we have turned down. Underwriting the cleavage of the Italian TV presenter was quite special in that we had to first define precisely what the cleavage comprised and what degree of scarring would threaten her career. Her concern was real, as there had been a number of acid attacks. In the end, the policy covered a larger area of skin, including her back. It gave her peace of mind and enabled her to continue in her profession.

Jonathan Thomas Head of Speciality on the Watkins Syndicate at Lloyd’s [email protected]

The two groups of clients we actually do insure tend to balance each other out. This enables us to take on the outliers, provided we take care to write a smaller line on them, charge appropriate premiums and underwrite them rigorously. This way, body-parts insurance is in fact the same as every other line of insurance. It reflects the lateral thinking and detailed knowledge that characterise how we do business at Lloyd’s.


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COLUMN

Natural catastrophes

Loss mitigation by learning from losses Tobias Büttner, Head of Corporate Claims at Munich Re [email protected]

Ten years on, Hurricane Katrina remains one of the costliest losses ever sustained by the insurance industry. Looking back on an event of this magnitude always raises the question of what lessons can be learned for similar scenarios in the future: Which measures to limit the extent of the loss were successful? And what part does the insurance industry play in all this? In the aftermath of Katrina, building codes were improved in an attempt to take precautions against similar loss events, particularly in the US states with the greatest exposure to flooding. These efforts revealed the importance of ensuring close coordination of public and private prevention measures. But they also highlighted the difficulties that can arise when many different organisations with convergent responsibilities are involved. At the same time, the consistent enforcement of the new building codes and safety standards were frequently hampered by a lack of viable alternatives to building in certain areas and the scarcity of the financial resources of those involved.

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On the whole, however, recent experience with hurricanes in the US has shown that a greater risk awareness of all parties concerned can help to limit the losses. For instance, there can be little doubt that the early warnings and large-scale evacuation measures helped to significantly reduce the losses from Hurricane Sandy in 2012. The cyclones Odisha and Hudhud in India are another prime example of the effect that timely and consistent precautionary measures can have: Odisha claimed 10,000 lives in 1999. In 2014, the hazard zone was evacuated quickly and over a large area before Hudhud struck. Thus, although the two cyclones were very similar in scale, Hudhud claimed only 84 lives. Examples demonstrating the efficacy and wisdom of loss prevention measures also abound in Europe. The Elbe floods in 2002 and 2013 both caused insured losses of around €2bn. However, the similarity in loss figures was caused by a significant increase in insurance density and value concentration in the region during the intervening period. The overall economic loss in 2013 was only about half as high as in 2002, dropping from over €11.5bn to less than €6bn.


This reduction was mainly due to the expansion and improved maintenance of the dyke network. Apart from this, preventive measures by homeowners and firms, such as relocating heating systems to upper floors or sealing buildings more effectively, also helped. Here too, however, close cooperation between all public and private players was clearly an important factor in mitigating the overall loss, rather than simply shifting the loss burden. The insurance industry’s role in this development goes far beyond the transfer of financial risks. Timely information on the potential risks raises risk awareness and draws attention to the options available for prevention. At the same time, attractive premiums help to create incentives for preventing or at least limiting losses. >> M ore information at munichre.com/publications

Preview 4/2015 Right place, right time Many energy sources, including wind and solar power, deliver a fluctuating supply. In response, energy-storage technologies are advancing. But with the progress come risks: understanding and insuring them are key to viable sustainable energy systems.

© 2015 Münchener RückversicherungsGesellschaft Königinstrasse 107 80802 München Germany Tel.: +49 89 38 91-0 Fax: +49 89 39 90 56 www.munichre.com Münchener RückversicherungsGesellschaft (Munich Reinsurance Company) is a reinsurance company organised under the laws of Germany. In some countries, including in the United States, Munich Reinsurance Company holds the status of an unauthorised reinsurer. Policies are underwritten by Munich Reinsurance Company or its affiliated insurance and reinsurance subsidiaries. Not all coverages are available in all jurisdictions. Any description in this document is for general information purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product. Responsible for content Group Communications Editor Regine Kaiser Group Communications (address as above) Tel.: +49 89 38 91-27 70 Fax: +49 89 38 91-7 27 70 [email protected]

Picture credits Cover: dpa Picture Alliance/Brett Duke U2: Robert Brembeck p. 2 (1): Lee Celano/Reuters/Corbis p. 2 (1): Hajime Ishizeki/Corbis p. 2 (2): Getty Images p. 3 (1): dpa Picture-Alliance/ Robert Hardin/Julian Elliott p. 3 (2), 3 (3), 12, 13: Foto Meinen p. 4, 5: dpa picture alliance/landov/ Michael Democker p. 6: Rick Wilking (Top), Lee Celano (Bottom)/Reuters/Corbis p. 9: Mark Bover p. 9: Patrick Quigley p. 10: Lewis E. Link p. 14: Getty Images p. 16: Shannon Stapleton/Reuters/ Corbis p. 17: Watkins Syndicate 457 p. 18 Illustration: Kevin Sprouls Inside back cover: shutterstock Editorial deadline 14 July 2015 Printed by Kastner & Callwey Jahnstrasse 5 85661 Forstinning Germany Corporate Insurance Partner CIP offers holistic insurance protection for industrial and corporate clients throughout the world. The portfolio includes coverage concepts for property, energy, engineering, casualty and special enterprise risks. www.munichre.com corporate-insurance-partner @munichre.com

Hartford Steam Boiler Leading monoliner and inspection company for engineering risks. Apart from engineering covers, its range also includes specialty and engineering solutions, claims management and risk management services. www.hsb.com Tel.: +1 800 4 72-1866 [email protected] KA Köln.Assekuranz Agentur GmbH Internationally operating underwriting agency for industrial risks, specialising in marine and group accident insurance. www.koeln-assekuranz.com Tel.: +49 2 21 3 97 61-2 00 [email protected] Temple Insurance Company Temple Insurance Company underwrites large industrial and commercial risk management accounts. Our Technical and Special Risk Department provides property and casualty products directly through the Canadian broker network. www.templeinsurance.ca Toll free (North America): +1 877 364-28 51 Tel.: +1 416 364-28 51 Fax: +1 416 361-11 63 Watkins Syndicate 457 Lloyd’s biggest marine insurer with an extensive portfolio of solutions for accident and health, liability, cargo, marine and logistics, offshore energy, space flight, and yachts. The Watkins Syndicate operates its own department for terrorism risks. www.watkins-syndicate.co.uk Tel.: +44 20 78 86 39 00 [email protected]


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