Looking more ahead and less behind Munich Re’s Scott Hawkins explains why the solutions to understanding and dealing with future climate risks won’t be found in the past By John Deex
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decade ago the local insurance industry’s approach to climate change could be summarised quite simply. Insurers relied on solid evidence, not predictions of what might be, and as products are reviewed annually the industry could adapt as necessary. Not any more. Recent years have seen the industry take a much more proactive stance – and none more so than Munich Re. The giant German-based reinsurer carries out its own research into possible risks and acts on it, with its Australasian Managing Director Scott Hawkins saying the old ways don’t work when there is a stepchange in the scale of the threat. “[The approach] is changing for a couple of reasons,” he tells insuranceNEWS. com.au. “With climate, it’s easy to say it’s incremental, so therefore I can adjust every year. But then what you can end up with is a step-change.” He gives the example of Hurricane Katrina in 2005, which caused destructive floods that covered more than 80% of the city of New Orleans. “The levee was breached and the water could not escape. Given this was unexpected it changed views instantly rather than gradually over time. “I think there are a couple of reasons why everyone’s looking more to the future. There’s plenty of evidence to say things are going to change, and not in the positive. Also, we now have the technology where we can be more predictive. “In the past we relied on more standard actuarial techniques looking at what has
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happened previously to predict the future. Now we have the capabilities to predict the future based on the current data and evolve going forward.” Munich Re uses its research to inform its products and pricing, but also aims to be an opinion leader “to help shape what others should be doing to improve the landscape”. It has the expertise to be able to advise governments on where they should be building, for example. Mr Hawkins is circumspect about the upcoming cyclone reinsurance pool devised by the Federal Government, and suggestions that it should be expanded to cover all flood risks. He says reinsurance pools make sense when there is no capacity available, such as with terrorism after 9/11. But there is capacity for floods and cyclones. Pools are one way to improve affordability, but they don’t address the underlying risk, and caution is required. “It’s not a capacity problem,” he says. “It’s more of a discussion around whether the price is affordable for people to buy those products. That’s one reason to put things into a pool. “But what I would say is, you need to be mindful that you make the right decision for the long term. “We just need to be mindful that it creates a long-term sustainable product, that we don’t have the wrong risk signals, [and] that people don’t stop trying to improve their risk, or else you’re delaying the inevitable. “In the end any arrangement, whether it’s self-insured, given to the private
insurance market, or pooled and put on a government balance sheet – the losses are the same. “It’s just who pays for those losses in the end. “What we absolutely as an industry, and also as Munich Re, are encouraging governments to focus on is mitigation and resilience. It’s not just about making something slightly more affordable.” Mr Hawkins sits on the Insurance Council of Australia (ICA) board and shares ICA’s belief that increased spending on resilience is vital. That includes better land-use planning, so that “we make the right decisions on where we build going forward”. It’s a message that, in the wake of the devastating east coast floods, appears to be getting through. Mr Hawkins notes that when the cyclone pool plan was announced, so too was significant mitigation funding. “The Government is publicly more committed than it has been in the past. “We will watch with interest, and we also want to help inform the Government on where is the best place to put those funds for maximum impact. “But I think, in the end, we need to come back to the premise of a long-term sustainable product.” But what about those communities where no amount of resilience spending will reduce the risk to an acceptable level? Mr Hawkins says tough discussions about relocation may be necessary. “It’s a really hard one, to move someone
