Knowledge series

Highs and lows Weather risks in central Europe

Germany, Austria, Switzerland, Czech Republic, Slovak Republic, Slovenia, northern Italy

Heavy rainfall in August 2002 transformed the Elbe (normally just a narrow ribbon from the perspective shown in the upper image) into a lake (lower image) – with catastrophic consequences. The flood claimed more than 100 lives and caused economic losses of some €12bn in Germany alone.

Editorial

Dear Reader, The international headlines of the past few years have been dominated by extreme hurricane events along the US coastline. Katrina was certainly the most costly loss on record, with dramatic consequences in human terms, but Europe has also been hit recently by an unusually large number of weatherrelated catastrophes and disturbing new developments. To name but a few examples: the Elbe flood of 2002, Germany’s most costly natural catastrophe; the hot summer of 2003, a 450-year event, in which more than 70,000 died in Europe due to the heat; the August 2005 floods in the Alps, Switzerland’s most expensive natural catastrophe on record; Hurricane Vince, which developed off Madeira before heading towards Europe; Winter Storm Kyrill, Germany’s most expensive and Europe’s second most expensive winter storm, involving major losses across much of central Europe. In addition, eastern Europe repeatedly suffered prolonged, widespread floods. Analyses undertaken using our NatCatSERVICE database clearly show that the number of weather-related natural catastrophes in Europe has more than doubled since 1980. There is increasing evidence that this trend is already driven by climate change. It is time for a re-analysis of Europe’s meteorological risk situation. This publication gives you the most recent assessments of all the relevant weather risks in central Europe and an outlook on the changes we can expect in the coming years. The spectrum ranges from storms and floods to the effects of extreme temperatures. One chapter, devoted to the insurance-related aspects of weather risks, summarises current regulations in the different markets, providing a handy reference guide as to how neighbouring markets are dealing with the risk situation. The central message is that, as a result of climate change, past loss experience is no longer a suitable yardstick for predicting future losses. Instead, the consequences of global warming, which vary from region to region, must be anticipated now, and reflected in pricing and risk management. We trust that you will find the information contained in this publication to be both of practical use and informative.

Dr. Torsten Jeworrek Member of the Board of Management Corporate Underwriting/Global Clients

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Contents

Editorial Executive summary Climate change in central Europe

1 4 6

The risks

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Windstorm risks 12 Flood risks 20 Extreme temperatures, snow accumulation and risks in mountainous regions 26 Underwriting aspects Specific characteristics of the target markets Agricultural insurance Motor accidental damage (AD) insurance Marine insurance Hedging weather risks via the capital markets Weather insurance 32 34 42 44 45 46 48

Summary Geo services – Client services Appendix

50 51 54

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Risks, p. 10 Severe storms will grow more frequent and more intense due to global warming. The risk situation must be re-evaluated to ensure the growing losses can be insured in the future.

Underwriting aspects, p. 32 Increasing concentration of values in exposed regions is a major loss driver. The insurance industry faces the task of devising products to address new challenges.

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Executive summary
Scientific aspects The 2007 IPCC (Intergovernmental Panel on Climate Change) report confirms what Munich Re has long maintained: climate change is already taking place. It is more than 90% probable that this is largely due to climate-changing trace gases released into the atmosphere by human activities. The mean global temperature has increased by 0.74°C in the past 100 years and, in Europe, the mean temperature has risen by as much as 0.95°C. The IPCC also confirms our analyses indicating that climate change is already causing a greater number and higher intensity of weather extremes. Individual events such as eastern Germany’s major floods in 2002, the record summer temperatures in 2003 across much of Europe, flooding in the Alpine region in 2005, and Winter Storm Kyrill in January 2007 may not in themselves be directly ascribable to climate change. However, the growing frequencies and intensities of events tend to point to such an influence. In the light of these developments, it is necessary to carry out a new analysis of the risk situation in Europe arising out of weather-related hazards, such as exposure to winter storms, which will increase. A single event can lead to insured losses of over €50bn. However, events on a local scale should not be underestimated either. Hailstorm scenarios can cause billions in insured losses in major cities. Furthermore, the vulnerability of insured property is increasing due to structural changes, the use of new materials, and extension of the cover. As a result of selective underwriting, insured losses from floods remain low in central Europe, but the loss potential is growing because the incidence of heavy precipitation is rising, exposed areas are being developed, and concentrations of values in the areas at risk are increasing. Scenarios involving more than one country are likely to produce losses of several billion euros.

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Weather risks in central Europe

Despite global warming, extreme winters like that of 2005/2006 remain a possibility. Heavy snowfall and prolonged cold spells during which the snow accumulates could cause major losses – as in Austria in 2006, when the insured market loss came to a substantial €300m. This is due to the fact that, in Austria, storm perils covered under household policies include snow load losses, resulting in market penetration of some 90%. By contrast, in Germany fewer than 10% of homeowners have an extended natural hazards policy under which snow load is covered. Insurance aspects Catastrophe losses have vastly increased for insurers in recent decades, five out of six natural catastrophes being triggered by weather extremes. Munich Re considers deductibles an effective means by which insurers can manage the risks, since the burden is more widely shared. Sublimits of up to 50% of the sum insured, on the other hand, are less efficient because, across the portfolio as a whole, they are much higher than the probable maximum loss Munich Re expects for natural hazards. However, sublimits can be useful when applied to individual risks. The market review (see pp. 34–41) provides a comparison of the differences between and special aspects of the various markets, so that we can learn and benefit from one another. Hail and storm insurance penetration in the central European countries reviewed is 80–100%, but the figure is generally much lower for flood risks. This is because the storm and hail perils are often covered under the fire policy. Market penetration in Switzerland, where the insurance of natural hazard risks (except earthquake) is normally obligatory, is virtually 100%. In Austria, unlike the other countries analysed, the state has set up an emergency fund for exceptional natural hazard events, financed out of tax revenues. However, there is no legal entitlement to compensation. State help is primarily used to deal with flood risks and reduced agricultural yields. Reduced yields have increased insurers’ loss ratios considerably in some years, resulting in higher premiums for farmers. In central Europe, cover in Austria is among the most comprehensive. In addition to hail, policies also cover frost, windstorm, flood, drought, and prolonged rainfall at harvest time, premiums being subsidised by the state to the tune of 50%. The provision of blanket, state-subsidised multi-peril crop insurance necessitates a risk partnership between the agricultural sector, the insurance industry and the state. Alternative risk transfer methods are assuming greater importance, given the growing loss potential. The securitisation of catastrophe risks by the issue of catastrophe bonds on the capital markets has soared since Hurricane Katrina. In 2006, around US$ 5bn worth of catastrophe risk bonds were issued, twice as much as in 2005. In all, catastrophe bonds currently amount to around US$15bn. Experts believe that, in the medium term, 20% of catastrophe risk capacity will be placed on the capital markets. In addition, catastrophe risks are traded using insurance derivatives. Thus, companies can protect themselves in the short term against the financial consequences of exceptional weather factors. It is now also possible to place risks with lower return periods (25–30 years), following an initial phase in which mainly top-layer risks were securitised. Munich Re uses catastrophe bonds to cover weather-related natural catastrophes (windstorm Europe, hurricane USA) and offers both insurance and derivative solutions tailored to the situation of the individual company. Munich Re’s Risk Trading Unit provides support and advice for clients on the transfer of risks to the capital markets.

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Climate change in central Europe
The mean global temperature is constantly rising. It has increased by 0.74°C in the last 100 years and by no less than 0.13°C per decade in the last 50 years – double the rate for the 100-year period as a whole. The rate of increase has been even more pronounced in Europe, with a rise of 0.95°C in the last 100 years, and as much as 1.0°C in Germany, 1.1°C in Austria and 1.4°C in Switzerland. The rise in temperature has been even more marked in the last few decades (see Fig. 1). Munich Re was one of the first companies in the finance sector to draw attention to the problem, pointing out in a 1973 publication on flooding that the growing losses might be due to human-induced climate change. The 2007 IPCC (Intergovernmental Panel on Climate Change) report confirms the statements and warnings we have issued over the last three decades: it is more than 90% probable that climate-changing trace gases released into the atmosphere by human activity are the primary cause of the global increase in temperature. Sir Nicholas Stern’s report on the “Economics of Climate Change”, published in October 2006, addressed the financial impact of climate change. It predicted a reduction in annual global growth of at least 5%, or US$ 2,200bn, by the middle of this century. The Stern Review forecasts that the costs will be limited to 1% of annual global gross domestic product (US$ 445bn) provided we take corresponding action. Such action would enable us to remain below the critical dividing line of a 2°C increase in global average temperatures compared with pre-industrial levels. This objective will only be achieved if CO2eq concentrations can be stabilised at 445–535 ppm by 2050. Some increase is inevitable due to growing emissions from emerging countries such as China and India. It is also crucial that we finance steps to adapt to climate-change impacts that can no longer be prevented. The insurance industry has a key role to play in this by providing solutions to deal with the financial losses.

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Effects during the winter half-year

Winter storms – The number of intense low-pressure systems forming over the Atlantic and the proportion of westerly weather patterns rose steeply in the period from the 1970s until around 1990. – Many climate models indicate an increase in severe storms by the end of the 21st century, despite a fall in winter low-pressure systems over the North Atlantic. As a result, Europe’s overall exposure to winter storms will rise. – Models show greater exposure to wind, affecting in particular a corridor extending from the UK to central Europe, together with northern France, the Benelux States, Denmark and northern Germany. – Studies based on a number of climate models project that Germany’s annual loss ratios for winter storm will increase by an amount ranging from 20% to more than 100% between the reference period 1960–1990 and the scenario period 2070–2100. Torrential rain, floods – Increased westerly air flows during the winter half-year have also resulted in a 20–30% rise in precipitation over western and southern Germany in recent decades, often bringing torrential rain and floods. – A climate model analysis by the Max Planck Institute for Meteorology in Hamburg projects an increase in winter precipitation of some 10–20% between the 1961–1990 and 2071–2100 averages for Germany as a whole, and as much as 30% on the North Sea coast, in Schleswig-Holstein and in the Central German Uplands. – Switzerland has experienced a far higher number of intense precipitation days (at least 70mm over a minimum 500 km2 surface area) on the northern edge and in the interior region of the Alps. – Winter precipitation is projected to increase by some 10–20% in the Swiss plateau region, southern Switzerland, many parts of Upper and Lower Austria, Burgenland, Styria and Carinthia, most of the Czech Republic, parts of the Slovak Republic and in the Alpine regions of northern Italy.

There has been a particularly steep rise in average temperatures in Europe since 1970. Source: CRU, 2003; Jones and Moberg, 2003

Fig. 1 Observed annual, winter and summer temperature deviations
Temperature change (°C) relative to average temperature in the period 1961–1990

Year Winter Summer

1.0

0.5

0.0

–0.5

–1.0

–1.5 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 Year

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Climate change in central Europe

Warmer winters – By the end of the 21st century, surface temperatures in winter across northern Germany will be 3–4°C higher than in 1961–1990. – Temperatures in southern Germany, Switzerland, Austria, the Czech Republic, the Slovak Republic, Hungary and northern Italy will increase by more than 4°C. – The intensity and frequency of heavy winter precipitation will rise substantially, and it will fall more often as rain than snow. Flood exposure will increase. – The 2°C rise in regional temperatures already predicted for the coming decades will result in a 40% decrease in Alpine winter sports areas with virtually guaranteed snow. If temperatures increase by 4°C, only 30% of this already reduced area will be left. Shrinking permafrost areas – The high-lying permafrost areas are receding and the increase in freeze-thaw cycles is loosening rock and detritus, which could cause more severe rock falls and avalanches. – Higher winter precipitation in the form of rain will soften the soil, resulting in more frequent landslides.

Effects during the summer half-year

Heatwaves – In the course of the 21st century, temperatures will continue to increase during the summer half-year: by 2.5–3.5°C in northern Germany, compared with the 1961–1990 average, and more than 3.5°C in southern Germany, the southwest Czech Republic, Austria, Switzerland, northern Italy and Slovenia. Many places will experience more heatwaves. – Scenarios for Upper Austria indicate heat periods (temperatures remain at or above approximately 30°C for a minimum of 20 days) every two years on average, compared with every 20 at present. There will also be significantly more dry periods – like heat periods, often associated with high-pressure conditions – in Upper Austria, Burgenland and Styria. – According to the results of climate research, Switzerland, the Czech Republic, the Slovak Republic, Hungary, northern Italy and Slovenia can also expect more periods of heat and drought.

Fig. 2 Temperature change between 1980–1999 and 2080–2099
Change in annual average temperature (°C) 70°N 10°C 7 5 4 3.5 3 2.5 2 1.5 1 0.5 0 –0.5 –1 0° 10°E 20°E 30°E 40°E

60°N

Comparison of changes in European temperatures and precipitation during the periods 1980–1999 and 2080–2099. Left: Change in annual average temperature (°C). Right: Percentage change in precipitation amount (subdivided into winter and summer). Source: IPCC 4

50°N

40°N

30°N 10°W

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Precipitation – Total precipitation in the summer half-year will decrease, but some events could be more intense, so that rainfall will be distributed over a smaller number of occurrences. – One climate model shows that average July–September precipitation will be significantly less than in the period 1961–1990, the reduction being as much as 20–30% in parts of Austria, northern Italy, the Czech Republic, Switzerland and the Slovak Republic. – Conversely, 1% heaviest five-day summer precipitation will increase in parts of northern Italy and northern Switzerland and along a band comprising northern Austria and many parts of the Czech Republic, Poland and eastern Germany. – Models indicate that a warmer climate could mean fewer low-pressure rain systems forming in the northern Mediterranean basin due to central European trough conditions. However, those precipitation events could become more intense. Thunderstorms – The tendency towards thunderstorm formation, with the risk of hail, strong gusts, tornadoes, flash floods and lightening, will increase to a varying extent, depending on the region. This trend has been confirmed by observations in the Swiss plateau region and in southwest Germany, where it has been directly measured during the past 30 years. – The Swiss observations show that European weather conditions conducive to thunderstorms also became more frequent in the course of the 20th century. Consequently, local increases of this sort are also probable for other regions of central Europe, although difficult to substantiate at the present time. Climate models are still too approximate to indicate such effects in the projections. In the areas of northern Italy, Slovenia and southern Austria affected by moist air masses from the Adriatic, people will have to be prepared to deal with more severe thunderstorms bringing hail, heavy precipitation and strong gusts. West European trough conditions – Repeated bouts of extremely severe precipitation along the Mediterranean coast from southeast Spain to Italy and Slovenia cause floods between September and November. Torrential rain events in late summer and autumn are expected to become more frequent and intense in the Mediterranean countries. The following chapters explain the scientific basis underlying the main perils that affect central Europe – windstorm, flood and extreme temperatures. In addition, the specific underwriting characteristics of the relevant countries are summarised.

Fig. 3 Change in precipitation (%) between 1980–1999 and 2080–2099
Winter: December, January, February 70°N Summer: June, July, August 70°N 50% 30 20 60°N 60°N 15 10 5 50°N 50°N 0 –5 –10 40°N 40°N –15 –20 –30 30°N 10°W 0° 10°E 20°E 30°E 40°E 30°N 10°W 0° 10°E 20°E 30°E 40°E –50

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The risks
Experts paint a gloomy picture: not only will the weather be more extreme, it will also be extremely expensive unless we act now. Since risks can be insured only if they are measurable, it is imperative that we analyse geoscentific events and the processes involved – and understand them.

The cold front of a low-pressure system looms, bringing with it a bank of dark cloud. The scene near Münchberg (MärkischOderland) in Brandenburg on 26 June 2007.

Windstorm risks
A single winter storm event can produce insured losses of over €50bn.

Well covered: market penetration of storm and hail insurance in central Europe is between 80% and 100%.

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Scientific aspects
There are two types of windstorm in central Europe that have high accumulation loss potential for the insurance industry: winter storms and local severe weather events (summer storms and tornadoes). Winter storms – meteorologically defined as extratropical – occur only from late autumn (October) to spring (April). A single winter storm event can cover an area extending from the north of the United Kingdom to south of the Alps and from the Atlantic into the heart of eastern Europe. Due to the geographical scale of this type of storm, individual losses can run into millions, and the insurance industry can face losses of over €50bn. Local severe weather events, on the other hand, occur year-round, but are most frequent in summer. Although limited in area, the complex nature of such events (lightning, torrential rain, hail, downbursts and tornadoes) can mean accumulated insured losses of the order of several billion euros. Winter storms In Fig. 4 (illustrating tracks of historical windstorms across Europe), the unbroken lines show the course taken by the centre of the relevant low-pressure system. However, the areas affected can only be identified by means of a wind field – showing, for example, the geographical area affected by peak-gust wind speeds. This is illustrated by a wind field analysis of Winter Storm Kyrill (2007) performed by Munich Re’s Geo Risks Research experts (Fig. 9, page 19).

Insurers require such information to be able to estimate the resulting losses. Using simulation techniques, wind fields can be superimposed onto the geographical distribution of an insurance portfolio. The estimated loss share per individual risk can be determined on the basis of the empirical relationship between the relative extent of loss (or ratio of loss to new replacement value or sum insured) and the modelled windstorm speed. The projected accumulation loss resulting from an event can then be calculated by adding up the individual losses throughout the entire winter storm loss area (see also the section on loss potential, page 16). Local severe weather events: Thunderstorms and associated hail and tornadoes A thunderstorm consists of a towering cloud in which there are powerful updraughts and downdraughts. It brings storm-force and hurricane-force gusts, lightening and precipitation. Thunderstorms are classified according to their dimensions and the way in which they form. – Single-cell storms last, as a rule, only 30–60 minutes. They rarely produce severe weather events. A typical example would be an isolated summer thunderstorm. – Severe thunderstorms that are grouped together are referred to as multi-cell storms. Such complexes last considerably longer than their single-cell counterparts. Multi-cell storms are found either as a cluster or as a line along a cold front.

Fig. 4 Tracks of historical European windstorms since 1967
Although most storms cross the North Sea, causing losses in northern parts of central Europe, they occasionally follow a more southerly track, so that areas of southern and southeast central Europe are also affected. This was the case, for instance, with Lothar and Martin in 1999, and Wiebke in 1990.

Trondheim

Bergen

Oslo Stockholm Gothenburg

Aberdeen Edinburgh Belfast Dublin Leeds Amsterdam London Brussels Luxembourg Paris Nantes Dijon Geneva Bordeaux
0 150 300 Kilometres

Rostock Hanover Berlin Warsaw Krakow

Prague Munich Vienna

Zurich

Budapest

Verona Genoa Marseilles

Zagreb

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Tornado in Saxony-Anhalt on 23 June 2004. The village of Micheln was hit particularly hard. Six people were injured and 275 houses damaged.

– Supercells are storms in which wind speed increases and wind direction varies with height so strongly that a rotating updraught is produced that lasts for at least 10–20 minutes (mesocyclone). Supercells are much larger and more organised than normal single cells. They last longer and bring heavy precipitation, being accompanied in 30% of cases by extreme weather phenomena such as hail, downbursts or tornadoes. Hail: High accumulation loss potential Hail, a by-product of severe thunderstorms, is of major significance to the insurance industry. Hail designates precipitation in the form of grain-size lumps of ice of at least 5 mm diameter, smaller particles being referred to as snow pellets. The largest recorded hailstone was found in Nebraska, USA, on 22 June 2003. It had a diameter of 17.8 cm and a circumference of 47.6 cm (softball size). The terminal velocity of hailstones increases in proportion to the square root of their diameter. Thus, a 1-cm hailstone impacts at a speed of around 50 km/h, compared with 170 km/h in the case of a 14-cm specimen. Hailstones of this size can have fatal consequences for humans and animals. The vertical and, in particular, horizontal speed can increase if the hailstorm is accompanied by storm-force gusts, and this results in much greater damage to vertical surfaces such as walls and windows.

Tornadoes – Limited in area but highly destructive Tornadoes (on land) and waterspouts (over water) are large vortices of air that rotate about a vertical axis. They normally extend from the edge of a storm cloud to ground level. According to Alfred Wegener’s 1917 definition – still accepted as authoritative – they are fully or partially visible and have exceptionally high destructive potential. The terms whirlwind and tornado are used synonymously. There is no difference between tornadoes in North America, Europe and other regions of the world with regard to physical nature and severity – only in terms of occurrence frequency. The ground-level diameter of tornadoes can vary from some tens or hundreds of metres to as much as 1–2 km in a number of observed instances. This broad range can also include multiple vortex tornadoes, in which two or more vortices rotate about a common centre. Tornadoes can last anything from a few minutes to an hour. The translational speed is normally 50–100 km/h. Wind speeds inside a tornado can be as high as 500 km/h. The international standard used to measure tornadoes is the sixcategory Fujita Scale, which is based on maximum wind speeds. The 12-category Torro Scale is also used in Europe. Since weather stations seldom survive the passage of a tornado, intensity is normally estimated on the basis of the extent of loss: from minor property damage to total destruction. Tornado losses are mainly caused by wind pressure and – at higher wind speeds – flying debris. Buildings may also implode due to a sudden drop in the pressure within the tornado, particularly if the façade is made of sealed glass panels.

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The risks

Fig. 5 Tornado events in Europe 1995–2006

Rostock Hamburg Berlin Düsseldorf Frankfurt Nuremberg Stuttgart Munich Zurich Graz Linz Prague

Geneva

Milan

Zagreb

Tornado frequencies in central Europe Systematic recordings can only be obtained with the aid of a high-resolution weather radar network, tornadoes being of relatively limited dimensions. Europe has only had such networks since the 1980s and 1990s, so that observations of weaker tornadoes have increased substantially in the last ten years. On the other hand, no clear trend has emerged with regard to severe events. In Europe, some 170 tornado observations are recorded each year, in addition to around 160 waterspouts (tornadoes that form over water and do not make landfall). Scientists believe that the actual figures for Europe are closer to 300 tornadoes and 400 waterspouts per year. Most of the tornadoes are of low to medium intensity. However, in Germany for example, two F5 tornadoes have been documented since 1769 and eight F4 tornadoes since 1891 (see tornado scale, Table 7, p. 55). Other F4 and F5 category tornadoes have been recorded in northern France, the Benelux States and northern Italy. Tornadoes appear to occur more frequently in specific regions of central Europe, just as the incidence is higher in Tornado Alley in America’s Midwest.

Average annual number of Bologna tornadoes per 10,000 km2 Genoa between 1995 and 2006. This shows that windstorms of this type tend to be 0 50 100 Kilometer concentrated primarily on central Europe. (Data source: European Severe Weather Database)

Occurrences per year per 10,000 km2 0 0–0.3 0.3–0.6 0.6–0.9 0.9–1.3 1.3–1.6 Tornado event

Table 1 Observations and estimated tornadoes per year
Country Germany Austria Switzerland Northern Italy Czech Republic Slovenia Slovak Republic Florida (USA) Oklahoma (USA) Observations 10 3 2 15 7 1 1 Estimate Tornadoes of 10,000 km² 30 0.84 5 0.60 3 0.73 15 0.50 10 1.27 1 0.49 4 0.82 3.60 3.20

Source: Dotzek, N., 2003: An updated estimate of tornado occurrence in Europe. (Atmos. Res. 67–68, 153–161) Munich Re Weather risks in central Europe 15

The risks

Table 2 Insured market losses
Country Insured market losses (€bn) due to winter storms 12 1.5 2 0.2 < 0.3 < 0.2 < 0.2 Insured market losses (€bn) due to hail (scenario) 5 (Ruhr area) 2 (Vienna) 1.5 (Zurich) 2 (Milan) < 0.5 < 0.3 < 0.3

Germany Austria Switzerland Northern Italy Czech Republic Slovak Republic Slovenia Insured market losses caused by winter storms or hail in central Europe with a 250-year return period.

Loss potential
Loss susceptibility Thanks to the generally solid construction techniques practised in central Europe, structural damage tends to be the exception, even with high wind speeds. The same applies to the effects of lightning and hailstorms. Damage is mainly external, i.e. roofs, windows and installations affixed to the building’s exterior. According to findings in countries in central Europe for which detailed information on major loss events is available, insured properties have tended to be increasingly prone to windstorm and severe weather damage in recent years (ratio of loss to sum insured). This is in part due to:

– Structural changes (extensions, special features, maintenance situation in respect of roofs and windows) – New construction materials (metal, glass and plastic façades, insulation) – Species, age, height and condition of trees in the vicinity of the buildings – Broader covers (e.g. inclusion of damage to fences and garden installations, and of the cost of removing debris) – Claims settlement practices in a new competitive environment Loss susceptibility is not constant but a factor which can change significantly over a period of time. Risk assessments (accumulation studies, minimum required premium rate analyses) therefore have to be adjusted accordingly.

Fig. 6 Distribution of 1980–2006 losses by event type: Winter storm, hail, severe weather/tornado/local storm Overall losses: €45bn*
56%

Insured losses €20bn*
64%

20%

24%

24%

12%

Winter storm Hail Severe weather events/tornadoes/local storms * At 2006 values. 16 Munich Re Weather risks in central Europe

Losses by storm type Fig. 6 shows a breakdown of losses by storm type. Over half of overall losses and nearly two thirds of insured losses were caused by winter storms. Loss potential Table 2 shows potential insured market losses for the given storm perils based on a 250-year return period. Market penetration of storm and severe weather insurance varies widely in central Europe (see also pp. 34–41). Overall damage could thus be greater by up to a factor of two in some cases.

It is difficult to estimate tornado loss potential due to the extreme (spatial) infrequency of such events. The most violent to date was at Pforzheim, Germany, in 1968. The original loss figure was €45 million, which would be approximately €270m at 2006 values. In theory, they could strike any of central Europe’s major conurbations and the loss potential would be correspondingly higher.

Table 3 Selection of major windstorm catastrophes in central Europe since 1990*
Year 1990 Event Winter Storm Daria Winter Storm Herta Winter Storm Vivian Country Germany Germany Germany Austria Switzerland Germany Austria Switzerland Italy Switzerland Germany Germany Germany Austria Switzerland Germany Germany Germany Switzerland Northern Italy Austria Czech Republic Northern Italy Germany Switzerland Northern Italy Germany Czech Republic Austria Switzerland Germany Northern Italy Slovenia Slovak Republic Germany Austria Germany Germany Austria Czech Republic Switzerland Overall losses €m* 1,000 500 1,000 100 70 1,000 100 70 15 85 100 420 240 5 10 400 150 1,600 1,500 500 160 17 200 570 220 80 1,700 20 100 190 250 400 15 190 210 80 380 3,500 500 50 150 Insured losses €m* 500 250 500 60 50 500 60 50 No details 40 85 320 200 No details No details 300 100 650 800 No details 90 6 35 340 170 55 1,200 10 70 50 80 10 No details 10 150 60 230 2,400 200 30 75

25–26.1.1990 3– 4.2.1990 25–27.2.1990

28.2.–1.3.1990

Winter Storm Wiebke

1992 1994

21.7.1992 28.8.1992 4.7.1994 26–29.1.1994

Severe weather event Hail Hail Winter Storm Lore

1995 1999

21–23.7.1995 3– 4.12.1999 26.12.1999

Windstorm Emily Winter Storm Anatol Winter Storm Lothar

2000 2001 2002

3– 4.7.2000 6–7.7.2001 7–8.7.2001 26–27.2.2002 24.6.2002 5.8.2002 26–30.10.2002 16–17.11.2002 25–28.11.2002 2–3.1.2003 29–31.8.2003 9.8.2004 20.11.2004 7–9.1.2005 16–17.6.2006 28–29.6.2006 18–20.1.2007

Hail Severe weather event, tornado Severe weather event, tornado Winter Storm Anna Hail Hail Winter Storm Jeanett Severe weather event, windstorm Severe weather event, landslides Winter Storm Calvann Severe weather event, landslides Hail Winter storm Winter Storm Erwin Hail, severe weather event Hail, severe weather event Winter Storm Kyrill

2003 2004 2005 2006 2007

20–21.6.2007

Severe weather event

* Original values, not adjusted for inflation; converted into € at month-end/year-end exchange rates. Source: Munich Re’s NatCatSERVICE

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Winter Storm Kyrill

Meteorological development Winter Storm Kyrill marked the climax of an above-average 2006/2007 winter storm season in Europe that included Britta, Karla, Lotte and Franz. The low-pressure system which gave rise to Kyrill formed in the central Atlantic on 17 January 2007. With maximum gusts of 135 km/h, Kyrill swept across England and the North Sea before heading for southern Denmark. On the afternoon and evening of 18 January, peak gusts exceeding 100 km/h were observed over wide areas of the Netherlands, Belgium, Luxembourg, and Germany. Many regions were hit by gale-force gusts of more than 120 km/h, the strongest of which was registered on the Wendelstein mountain in Germany (202 km/h). Thunderstorms, some of them violent, formed in the cold front area and were accompanied by hailstorms. Damage was also caused by tornadoes in eastern Germany. On the night of 18–19 January, the storm shifted further east, maximum wind speeds of 140 km/h being recorded in Poland, the Czech Republic, and Austria. Fig. 9 shows Kyrill’s wind field – winds exceeded 100 km/h over much of the United Kingdom, the Benelux states, Germany, Poland, the Czech Republic and Austria.

Fig. 7 Overall European windstorm losses and insured losses 1970–2007*
Losses in €bn 20 15 10 5 0 1970 1975 1980 1985 1990 1995 2000 2005

Overall losses per year (€bn) Insured losses per year (€bn)

Fig. 8 Insured European windstorm losses 1970–2007*
Losses in €bn 35 30 25 20 15 10 5 0 Jan. Feb. Mar. April May June July Aug. Sept. Oct. Nov. Dec. No. of windstorms per month 70 60 50 40 30 20 10 0

Overall losses per month (€bn) Insured losses per month (€bn) No. of windstorms per month

* 1970–2006 at 2006 values; 2007 at original values.

Losses
Germany – Ten fatalities – > 1.5 million individual losses – Hundreds of thousands of households suffered power cuts – Rail transport at a standstill throughout the country – Slight to moderate storm surge on the North Sea coast Switzerland – Local wind speeds up to hurricane force (> 120 km/h) – Minor damage United Kingdom – 12 fatalities – Estimated > 0.5 million individual losses in central and southern England – Tens of thousands of households left without power – Beaching of container ship MS Napoli France – Two fatalities – Only northern France affected Czech Republic – Three fatalities – Damage throughout the country Netherlands – Five fatalities – Damage throughout the country Belgium – Two fatalities – Damage throughout the country Austria – > 150,000 individual losses – 20,000 households hit by power cuts Poland – Four fatalities – Damage throughout the country

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The risks

Comparison of Kyrill’s wind field with major historical European windstorm events On the basis of an analysis of wind speeds and affected regions, the closest comparison with Kyrill is Winter Storm Daria (1990). Lothar (1999) had a completely different geographical focus (France, especially Paris, Switzerland, southwestern Germany) and is therefore not really a suitable benchmark. Regarding Germany alone, Kyrill could also be compared with Jeanett (2002). However, both the overall geographical scope and the duration of Kyrill were considerably greater. Daria (1990) cost the insurance industry some €4.4bn at the time (approximately €10bn at 2006 values), most of which was incurred in the United Kingdom. Lothar (1999) set a new European record for insured winter storm losses, costing €5.9bn at original values (€7.3bn at 2006 values). Jeanett (2002) caused a market loss of €1.7bn in Europe (approximately €2bn at 2006 values).

Fig. 9 Kyrill’s wind field

Gusts in km/h 80–90 90–100 100–110 110–120 120–130 130–140 >140

Fig. 10 Historical wind fields of windstorms Daria, 1990, Lothar, 1999 and Jeanett, 2002 (from left to right)

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Water, water, everywhere: Ritopek, a suburb of Belgrade, during the Danube floods in April 2006.

Flood risks
The ratio of insured to overall flood losses remains low in central Europe due to selective underwriting. Despite this, both the losses and the demand for cover are increasing. Effective construction and land-use planning could help loss prevention considerably.

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Scientific aspects
Flood Almost all places in central Europe are faced with the risk of flood. It is a threat to which buildings and installations close to water are regularly exposed, but even areas some distance from watercourses and lakes are not safe. The causes and effects vary from gradual inundation by the rising waters of a lake or water table to debris flows in raging torrents. Floods are classified as follows: – River floods: These occur following widespread heavy rainfall or as a result of snowmelt. – Flash floods: These result from intense precipitation, typically during severe summer storms, usually over limited areas where there are considerable differences in relief. – Torrents and debris flows: A mountain stream can be transformed from a babbling brook into a raging torrent in a matter of minutes, causing erosion to slopes and channels. The water carries rocks, stones, sand and earth along with it. If the solid content is more than 30%, this is known as a “debris flow”. – Storm surges: Storm surges occur at the coast and on the shores of large lakes. Rising sea levels will further increase the risk of storm surge and erosion on coastlines throughout the world – one of the most serious consequences of global warming.

Water can pose a threat in many different ways – when towns, villages and the countryside are gradually inundated (top: Prague, August 2002), when rivulets are transformed into raging torrents (second from the top: the Steinerne Mühl river in Austria), when debris flows consisting of water, rocks, stones and earth slide into valleys, engulfing villages in their path (third from the top: Brienz in the Bernese Oberland, August 2005), or when water is whipped up into a storm surge by high winds (bottom: storm surge, flooded Hamburg fish market, November 2006). Munich Re Weather risks in central Europe 21

This satellite image taken on 22 August 2002 shows the low-pressure system Ilse, which caused catastrophic floods along the Elbe and its tributaries in Saxony. Research by the German Weather Service shows a significant increase in the number of these central European weather troughs – also known as Vb weather conditions – in recent decades.

Changes in central Europe’s “flood weather”? There is no doubt that a warmer global climate will raise the concentration of water vapour in the atmosphere. This will not only increase precipitation generally but also lead to more extreme rain intensities in the event of regional or local severe weather events, as observed in many places over the past few years. The variability of precipitation events is growing and extreme weather conditions are becoming more frequent. Central Europe is increasingly being affected by westerly weather patterns and Vb depressions (see photo above). During Vb weather conditions, lowpressure systems from the Mediterranean basin move eastwards of the Alps in a northerly direction. German Weather Service studies show that the incidence of Vb weather conditions has risen sharply in recent decades. For example, in summer 2005, there were three consecutive Vb weather periods in the space of just six weeks. This does not go against the general trend towards drier summers in some regions. Current climatechange studies indicate that winters will become wetter and summers drier (at least in southern Germany). However, rainfall will be heavy and concentrated into periods of a few days in the summer. The high intensities will bring more flash floods.

Reasons for increased flood losses The rise in flood losses is primarily due to the increasing development of land near rivers and lakes. Mistakes have been and still are regularly made in construction and land-use planning. This situation could be rectified if responsibility for land use were transferred from a local to a higher level. It should be mandatory that anyone proposing to build be informed of current risk exposure. Such information would include the potential uninsurability of property on a specific plot of land. People like to live near water, in many cases knowingly accepting the risks, and forgetting about them entirely as time passes without incident. Furthermore, values in exposed areas can soar, thanks to a sometimes illusory feeling of safety, if protective measures (such as warning systems, flood barriers, civil protection structures) have been installed. Never before have properties been as large, as valuable and as vulnerable as at present. Heating systems and the associated oil storage tanks are among the main problems. Moreover, the basements of apartment or commercial buildings often house the central control systems of lifts and airconditioning facilities, storage rooms and sometimes even computer centres. Nevertheless, the ratio of insured to overall flood losses remains relatively small in central Europe, largely due to the low market penetration. Furthermore, most losses involve uninsured public facilities such as roads, railway lines, dykes, river channels, bridges and other infrastructure installations (e.g. water supply and sewage systems). In Germany, private-property losses accounted for around 60% of €350m in the Whitsun 1999 floods in Bavaria, for 43% of €8.6bn when the River Elbe flooded in Saxony in 2002, and for just 15% of €330m in the 1997 River Oder floods in Brandenburg.

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The risks

Switzerland Central Switzerland suffered the most disastrous floods in its history in 2005. If the heavily industrialised areas around Zurich and Basle were flooded, losses could run into billions of euros. Italy Italy came within a hair’s breadth of disaster when the areas along the middle and lower reaches of the Po escaped flooding in November 2000. A repeat of the November 1951 floods would produce tens of billions of euros in losses. As things stand at present, however, less than 5% would be insured. Czech Republic Almost all parts of the Czech Republic have been hit by one or more flood events in recent years. A rainfall centre at the heart of the country could affect the entire Czech Republic at once. Losses on the Elbe (2002) would then be added to those of the Oder (1997), producing a potential total of around €5bn. A substantial portion of this would be insured. Slovak Republic Torrential rain and subsequent flash floods, causing tens of millions of euros in losses, are virtually a regular occurrence. A precipitation centre situated slightly to the south of that of 1997 (in the region of the High and Low Tatra mountains) and producing similarly copious quantities of rainfall could affect the whole country. Bratislava, the capital, faces a completely different major loss scenario. The River Danube is joined to the north of the city by the River Morava, and then crosses the country’s economic heartland. However, the most recent major flood events – in 2002, 2005 and spring 2006 – caused little damage, despite flow return periods of some 50–100 years. Slovenia Slovenia is also prone to events capable of triggering nationwide flash floods, debris flows and landslides. The country had a taste of what might be in store in August 2005. Although Slovenia has no major water courses, the country is crossed by two typically alpine rivers, the Drava and the Sava, whose flood peak is potentially a multiple of the average flow rate.

Loss potential
Major loss scenarios and their loss potential A handful of events stand out in the chronology of the last 15 years’ flood disasters (Table 4). In future, still greater catastrophes may occur, causing even higher losses. Germany Values along the Rhine and its tributaries are much greater than those of the Elbe region in 2002. On the other hand, the Rhine has different hydrological characteristics, so that it is not necessarily appropriate to draw direct parallels. However, it can be assumed that an extreme weather event on the Rhine could involve economic losses considerably greater than the €11.8bn Elbe losses in 2002. Moreover, although flood cover is not as prevalent under household policies in western Germany, the insured losses could also exceed €5bn due to the Rhine area’s high industrial values. Austria A precipitation event on the scale of 2002 (over €400m in insured losses) could unleash disastrous floods along the Danube if the centre were slightly further south. In addition to losses on smaller rivers and streams, cities like Linz and even Vienna would have huge loss potential. Whilst the probability of a Danube flood affecting Vienna is low, the river bed within the city being designed to cope with a 1,000-year discharge, the relatively minor Wien river is more likely to pose a threat in the event of heavy local rainfall. Despite strict limits on the insurance of residential buildings, insured losses could be over €1bn, and as much as €3bn if the limits were raised or removed completely.

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The risks

Effective prevention strategies Governments, businesses and private individuals must be prepared to face extreme flood events involving heavy losses. Water authorities will have to take such risks into account when assessing protective measures. Insurers will have to make due allowance for this trend, primarily by charging premiums commensurate with the risks. Preventive measures can be divided into four categories. Although they are linked, each calls for a completely different approach. Flood prevention Floods are part of the natural hydrological cycle. However, man intervenes by influencing the climate (which results in increased and more intense precipitation), reducing the infiltration capacity of the soil (sealing, soil compaction due to agricultural activity), channelling the water into rivers and lakes (via drainage ditches, sewers), and to the sea (river regulation, removal of flood retention areas). Whenever possible, top priority must be given to retaining the water. At the same time, however, removing soil sealing, applying local flood detention measures, implementing river restoration schemes, and relocating dykes will have only limited effect on extreme flood peaks, given the sheer volume of water that swells a river in flood. Flood control Engineering measures can be used to control floods, such as restoration works, areas designed to retain the water, namely flood detention basins, reservoirs and polders, or dykes that channel flood waters. All these measures are based on what is called a design flood, i.e. using a relatively high flood value as a yardstick to design protection measures. The flood control methods most commonly used are dykes and flood defence walls, together with dunes and storm-surge barriers on the coast. Germany’s North Sea coastline and river estuaries alone have some 1,800 km of dykes, 650 km of which are directly exposed to storm surge. As well as meteorological and oceanographic factors (wind, storm surge height and duration, wave height) dyke standards are a crucial factor where safety is concerned. In Germany, dykes are normally designed on the basis of a 100-year water level, but allowance is also made for a safety margin, to take account of wave run-up, and a freeboard. Thus, for coastal dykes, the ultimate safety standard is in the 500–1,000-year storm surge range. Safety margins for river dykes are considerably lower. Dyke safety also depends on other factors, such as water permeability and resistance to erosion.

Loss prevention Losses occur when people and their possessions are affected. To prevent losses, either the water has to be contained or people (and their values) must not be exposed to its effects. Structural measures designed to protect property can help, together with suitable use of the land and appropriate responses to danger (such as taking the precaution of evacuating parts of buildings that are at risk). Risk prevention The risk of loss is derived from the probability of flood and the ensuing costs. The risk at any one place is nil if there is no possibility of flooding or values are nil at that particular location. However, if we include the flash flood hazard, virtually no developed areas of central Europe are completely free of risk. The risk can be minimised by implementing measures designed to prevent floods and losses. However, a residual risk will always remain. – Reducing the underlying risk for society as a whole is primarily a task for the state. It sets up observation and early-warning systems, controls flood discharge, and enacts statutory provisions that provide a legal framework for the use of exposed areas. Optimum preparation for dealing with catastrophe situations is extremely important. This primarily concerns early-warning systems and effective alarm strategies. – Property owners can help prevent loss by constructing suitable buildings and by being prepared to respond to emergencies and ready to act if disaster strikes. – The main task of insurance companies is to provide compensation for major financial loss. In addition, they can and must actively support riskprevention measures.

What is a 100-year flood? A 100-year flood is the discharge or the water level reached at a given point on a river once in every 100 years (return period) on a long-term average. Thus, a 100-year flood is expected to occur approximately ten times in every 1,000 years. However, this does not indicate at all when such occurrences will take place. Strictly speaking, it is not possible to define the return period for a geographical area, but only for a specific location. Attempts to do so – usually in the media – are not normally based on statistical findings but rather a matter of conjecture, and purely subjective. Although it is possible to use models to draw conclusions about flood loss frequencies, loss return periods cannot be equated with flood return periods.

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Table 4 Central Europe’s most costly flood catastrophes since 1990*
Overall losses €m 1,245 520 350 1,765 530 7,470 2,315 245 5,400 3,205 1,660 330 760 410 315 10,000 9,440 390 16,825 11,830 2,445 2,445 2,690 1,950 172 515 40 4 390 125 21 Insured losses €m 415 200 705 160 50 700 105 725 410 280 32 290 70 240 550 355 195 3,465 1,835 410 1,225 1,445 1,300 40 110

1993

1993 1994 1995 1997

1999

2000

2002

2005

2006

Switzerland, France, Italy of which northeast Italy Switzerland Rhine (Germany, France, Netherlands, Belgium, Luxembourg) of which Germany Northern Italy Rhine (Netherlands, France, Germany, Belgium, Luxembourg) of which Germany Oder (Czech Republic, Poland, Germany, Austria, Slovak Republic) of which Poland Czech Republic Germany Northern Alps and northern foothills of the Alps (Germany, Switzerland, Austria) of which Germany Switzerland Italy, Switzerland of which Italy Switzerland Elbe, Danube of which Germany Austria Czech Republic Switzerland, Germany, Austria, Hungary, Slovenia of which Switzerland Germany Austria Hungary Slovenia Elbe, Danube of which Germany Austria

40 15 3

* Original values, not adjusted for inflation; converted into € at month-end/year-end exchange rates. Source: Munich Re’s NatCatSERVICE

Outlook Is universal flood protection an affordable and attainable objective in the future? In terms of basic protection, the answer is yes but as regards protection against extreme events, the answer has to be no. The only remedy is to promote a keen awareness of the risks involved in all sectors of society. The most effective form of loss prevention is not to build in the vicinity of water. In 2007, the European Parliament passed a directive1 providing that member states must assess the flood risk for each river basin prospectively, on the basis of flood hazard and flood risk maps. Progress has been made in containing the flood risk in a number of member states. For instance, Germany passed a law in May 2005 restricting the development of areas exposed to flooding. Austria has recognised the need for a closer risk partnership between the state, the insurance industry and private individuals following the 2002 floods. Italy has, for some time, been contemplating the introduction of compulsory natural peril insurance.

Switzerland has been well prepared to deal with a flood catastrophe financially for some time now. A risk partnership has been established between the majority of Swiss cantons and their citizens, the costs of which are shared. The object of the partnership is to ensure the implementation of key prevention measures that involve aspects such as rural and urban development policy, structural flood defences and risk-prevention attitudes. Awareness is high in the Czech Republic following the 1997 and 2002 flood disasters, and large sums have been invested in protective measures. Flood insurance is subject to limits and a zoning system has been introduced. The insurance industries of Germany, Austria and Italy have also produced zoning and risk models in conjunction with the public authorities. These should be fully available from 2008. It is to be hoped that these actions will have the beneficial effect of a reduction in loss potential.

1

Directive of the European Parliament and of the Council on the assessment and management of flood risks. Munich Re Weather risks in central Europe 25

The dry, cracked banks of the Rhine in Düsseldorf, April 2007.

Extreme temperatures, snow accumulation and risks in mountainous regions
The hot summer of 2003, record temperatures in 2006, midsummer conditions in April 2007 – more frequent heatwaves and their impact on people and the economy are a challenge that the insurance industry faces in many lines of business.

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Heatwaves and drought
Average air temperatures in Europe rose by approximately 0.9°C in the last century – well above the global average. This resulted in periods of extreme heat and drought during the summer months. Climate models indicate that such trends will be even more pronounced in the future. Definition of heatwave and drought Whilst there is currently no standard definition of the term “heatwave”, it clearly comprises two elements: exceptionally high air temperatures and a period of several days’ duration. In the USA, a heatwave is defined as a series of more than three consecutive days on which temperatures are over 32.2°C (90°F). In central Europe, the term heatwave is usually applied to periods of several days during which daytime air temperatures exceed 30°C. Similarly, there is no clear definition of “drought” or “dry spell”. Drought is commonly understood to be a relative concept that denotes a reduction in water availability in a particular region over a given period compared with the long-term average. Thus, drought signifies a temporary shortage of water that is normally of gradual onset, as opposed to aridity, a permanent state. Opinions are divided as to whether climatological or hydrological extremes are in themselves sufficient to constitute drought, or whether it has to be demonstrated that they have resulted in adverse consequences. The problem with drought as opposed to permanent aridity is that nature (flora and fauna) and human beings have not adapted to the conditions, and this gives rise to a high degree of vulnerability. Heatwaves Heatwaves affect people directly, increasing the burden on the cardiovascular system and thus causing higher morbidity and mortality. They can also be a food-hygiene hazard, creating ideal conditions for the spread of salmonella, for instance. Hot summer of 2003 The meteorological summer of 2003 was a particularly extreme event over much of Europe. Between June and August, average temperatures throughout Germany exceeded climatological averages for the period 1961–1990 by 3.4°C. According to an analysis by the Frankfurt University Institute for Meteorology and Geophysics, on the basis of previous climate statistics this roughly corresponds to a 450-year event probability, even though May and September, which were also exceptionally hot, were not taken into account. Moreover, the heatwave is an even more extreme outlier in climate statistics since it affected not only Germany but also much of central, western and southern Europe. It claimed more than 70,000 lives and was, thus, one of Europe’s worst natural catastrophes in human terms of recent centuries.

July 2006 – New peak levels Just three years later, in summer 2006, new records were set across much of Europe. July was the warmest month ever recorded in Germany. Average air temperatures were between 19.9°C (Helgoland) and 25.1°C (Karlsruhe) – higher than the previous record month, August 2003. In Germany, all 31 days in July were registered as summer days (maximum temperatures of at least 25°C) at a number of weather stations, and up to 15 as tropical days. Rising temperatures in central Europe – A prelude to subtropical conditions? – The probability of a summer as hot as that of 2003 has increased by a factor of 20 in the last two decades. According to statistical analyses by Swiss climatologists, this is to be expected every other year in the last third of this century, that is to say it will become the norm. – Another Swiss study shows that the frequency of tropical days in Europe will have changed by the end of the current century. Central Europe will have an additional 40 tropical days each year, and northern Italy up to 60 more (Fig. 11). Drought Drought can be caused by increased evaporation or reduced precipitation but is generally due to a combination of both. During the prolonged highpressure weather conditions in summer, increased air temperatures and intense solar radiation cause greater evaporation, whilst precipitation amounts are low. That is why droughts and heatwaves frequently coincide. Since they tend to be caused by large-scale, persistent atmospheric conditions, they usually affect widespread areas. Higher water consumption by agriculture, industry and the population in general also causes, or at least exacerbates, drought. In the hot summer of 2003, central and eastern Europe suffered a major drought. Fig. 12 shows the areas most severely affected.

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The risks

Thus, where the insurance industry is concerned, not only are life and health business affected but also various property classes and business interruption insurance. Increasing heat stress can also hit tourism and the corresponding insurance products. All in all, we expect demand for protection to increase as industry and commerce become more aware of the risks posed by changing climate conditions. In the short term, protection is already available against the financial consequences of exceptional weather in the form of weather derivatives and weather insurance. These are based on a predefined event which triggers compensation for loss of earnings or additional costs. The long-term tendency towards hotter, drier summers will, of course, be reflected in pricing. At the same time, policyholders are also endeavouring to mitigate the risks by taking preventive action. This can be seen by comparing 2003 and 2006 in the agricultural sector. Farmers have made changes to their land and work in line with the latest agricultural best practices. They can also insure against crop losses. Crop insurance normally guarantees a specific sum insured, calculated by multiplying yield per hectare by price per tonne, rather than covering a certain quantity of yield. Technical progress plays a crucial role in risk assessment. New varieties, conservation tillage, and pesticides that cause less crop stress will further increase yields per hectare. Agriculture can and will adapt to climate conditions.

The summer of 2006 was also exceptionally dry, rainfall over much of Europe being only half the average. Similar drought spells will become far more common in many parts of central Europe in future, due to a substantial decrease in summer precipitation caused by climate change. This, together with the projected rise in air temperatures and associated increase in evaporation, will mean a dramatic increase in the probability of drought. Summary Central Europe is already exposed to heatwaves and drought because climate change is already happening and, indeed, gaining momentum. Exposure will therefore increase dramatically in future decades, constituting a risk of change that will affect the insurance sector. The more frequent and intense heatwaves generated by climate change not only significantly increase morbidity and mortality, primarily among the elderly, but also impact the economy. More accidents occur and productivity falls. In addition, heat and drought reduce agriculture and forestry yields, and falling river levels can significantly affect revenues in inland shipping and in the utilities sector, where power plants have to be shut down if insufficient water is available as coolant. The wildfire hazard also rises, increasing the risk of a major destruction of values (including insured values).

Fig. 11 Are the tropics extending into Europe?

Fig. 12 Precipitation anomalies, summer 2003
75°N 70°N 65°N 60°N 55°N 50°N 45°N 40°N 35°N 30°N 30°W 20°W 10°W 0° 10°E 20°E 30°E 40°E 50°E

1

5 10

20 30

40 50 60 70 80 90 100 200 Days

25

50

66

80

100 125 150 200 400

The map shows how the number of days with a maximum temperature of more than 30°C will change by the end of the century if the IPCC-A2 climate scenario (pessimistic, with very high emissions) is compared with the reference period 1961–1990.

Average summer precipitation in 2003 as a percentage of precipitation in the period 1961–1990. Source: The Global Precipitation Climatology

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Despite global warming, the possibility of extreme winters with high loss potential cannot be dismissed. In 2006, the roof of the ice rink in Bad Reichenhall (Germany) collapsed under the weight of snow following heavy falls combined with a prolonged cold spell. The death toll was 14.

Frost, snow and ice
Snowstorm, frost and freezing rain are perils that can have disastrous consequences, frequently underestimated in the past. In 2004, the German Federal Office of Civil Protection and Disaster Assistance organised a crisis-management exercise involving the relevant authorities and the utilities sector. It simulated this type of scenario: a snowstorm with freezing rain followed by sub-zero temperatures, 75% of municipalities and rural districts in southern Germany being without power for ten days. As a result, lighting, heating, cooling and ventilation systems, public transport, telecommunications and workplace equipment (machines, computers) came to a standstill almost everywhere. Public life was brought to a halt and even military communications were affected to an extent. In the mock exercise, hundreds of thousands of animals perished due to failure of the heating and ventilation systems in their quarters. There were also deaths in hospitals and retirement homes because the power cut affected heating and lifesustaining equipment, such as dialysis machines. Weather events of this kind can cause huge losses for the insurance industry, since policies may not explicitly exclude many of the costly knock-on effects (in the production and service sectors). These could be covered under business interruption or liability policies, for instance.

Potential major snow load losses All the climate models forecast warmer central European winters, with far less snow. Following a number of years when snowfall had been relatively low, the winters of 2004/5 and 2005/6 showed that the snow load risk was by no means a thing of the past. Major losses can still result if heavy snowfalls combined with prolonged cold spells cause a buildup of successive layers. Winter 2005/2006 brings heavy snow to Austria It began to snow heavily in Austria on 20 November 2005, particularly in the southeast (Carinthia and Styria), which was soon covered in a thick layer of snow. This was followed, from the beginning of December, by precipitation in the extreme west and south, lasting until a Genoa low brought rain or heavy snow to most of Austria. Major snowfalls continued into January 2006. The huge weight of snow caused damage in forest areas as well as to buildings, especially in Lower and Upper Austria, Salzburg, Burgenland and Upper Styria. Following a more settled period, from 17 January 2006, fresh snow began to fall on top of the existing layer in the west of the country. The snow catastrophe reached a climax on 7 February when the Austrian capital was also affected. Nearly all federal states reported collapsed roofs; schools, shopping centres, businesses, sports halls, and hotels were evacuated and churches closed. A state of emergency was declared in parts of Lower Austria and Upper Styria.

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The risks

The event occurrence issue Insurers and reinsurers need a clear definition of the snow load loss occurrence. Whilst the spatial and temporal parameters pose no problem from the meteorological perspective, defining the origin of the loss is more difficult, since it depends to a large extent on previous as well as current snowfalls – i.e. the weight of snow already lying on a roof. In a winter like the one described above, frequent heavy snowfalls are interspersed with short thaws accompanied by rain and frosty periods. The snow load steadily increases over the weeks unless reduced, to some extent at least, by a real thaw. If the weight then reaches a critical point, a “normal” snowfall will be sufficient to cause a roof collapse. Similar problems are encountered in connection with the definition of flood loss occurrence, and Munich Re formulated a proposal to address the issue some time ago. An equivalent proposal is needed dealing with snow load losses. – Flood: Although it has not triggered a flood, previous precipitation has saturated the ground to such an extent that infiltration is almost impeded and virtually all excess water flows directly into watercourses, potentially causing flood waves even without extreme precipitation. – Snow load: Prolonged snowfall (alternating periods of thawing and freezing making the snow more compact) results in a high snow base load. Even moderate further falls may cause losses. In principle, therefore, hours clauses are not appropriate for either category of peril.

Finally, the beginning of March saw the last major fall, when a low-pressure system from the Adriatic brought first rain, and then more heavy snow. Further building collapses were reported. The snow masses quickly melted in late March, as rain arrived and temperatures throughout the country climbed to over 10°C. The snow load risk was then succeeded by a rapidly increasing flood hazard. Fortunately, the rain soon ceased, and the country was spared an additional disaster in the form of floods. The snow proved a costly event for Austria. The economic loss is estimated to have been around €500m and the insured market loss some €250m. The scale involved is due to the fact that snow load losses to residential buildings, which are not insured in most other countries, are covered under storm policies in Austria. Market penetration is over 90%, whereas in the east of Bavaria (Germany), where similarly spectacular losses occurred, fewer than 10% of homeowners have extended natural perils insurance, which covers snow load hazards.

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Avalanches and other hazards common to mountainous areas arise suddenly and unexpectedly. Protective measures are therefore more complex than for flood events.

Avalanches, landslides and similar phenomena
Mountainous regions are exposed to characteristic natural hazards. Essentially, these are flash floods and various types of mass movement, i.e. debris flows, landslides, rockfalls, mass flows, glacier ice avalanches, glacial lake outburst floods and, of course, snow avalanches. They have huge destructive potential but are local occurrences, damage being confined to a limited area. They, accordingly, tend not to have major significance for the insurance industry. The winter of 1998/99 was marked by exceptional avalanche occurrences which claimed 79 lives and caused economic losses in excess of €800m (€1bn at 2006 values). Most of the insured losses occurred in Switzerland, where the loss borne by the insurance industry was nearly €200m (€250m at 2006 values). The average annual total of mass-movement losses in central Europe is also relatively low. Moreover, this type of risk can be avoided provided the danger zones, which are marked or at least known in most countries, are respected.

A number of spectacular events in the summer of 2006 (rockfall at the St. Gotthard Pass, collapse of a rock formation on the Eiger, glacier outburst flood in Samedan) have also highlighted the effects of climate change in the mountains. Permafrost areas will thaw and glaciers shrink still more quickly as a result of global warming. This will tend to destabilise sloping ground, producing more loose material, which will be carried downhill by landslides and debris flows if there is heavy precipitation. Although an increase in the number of debris flows is not statistically proven, the causal link is evident. The cost of preventive measures to counteract mountain risks compared with the losses involved is doubtless more disproportionate than in the case of flood – in central Europe at least. Switzerland alone has invested over €1bn in avalanche defence structures since the severe avalanches of winter 1951. This is mainly due to the fact that such occurrences are usually sudden and unforeseen, and therefore extremely hazardous to human life. Protecting human life rightly calls for the implementation of more costly measures than the prevention of property damage alone.

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Underwriting aspects
Loss experience is no longer a criterion for the assessment of future losses. It is time to re-analyse the risk situation in Europe due to weather-related perils.

Value concentrations are increasing – offering a growing target for natural hazards. Covers have to be changed in the light of this trend.

Underwriting aspects

Specific characteristics of the target markets
Market penetration for storm and hail cover in the central European markets reviewed is fairly high, at around 80–100%. This is mainly due to the fact that both risks were often covered under fire policies in the past, or considered in association with the fire peril. Market penetration is much lower in the case of flood risks. As cover for natural perils is obligatory in Switzerland, market penetration for natural hazard insurance in general is virtually 100%. In Slovenia too, almost 100% of personal lines policyholders have at least windstorm and hail cover, both still being insured under the fire policy. Similarly, market penetration in the Czech Republic and in the Slovak Republic is over 90% in the case of private households as a result of regulations in force prior to the political opening-up of the East. Since the 1997 and 2002 floods, this cover has only been offered in the Czech Republic subject to sublimits. The following tables list further differences between the various markets together with the characteristics of each one.
Germany Obligatory cover

Market penetration

Available covers (shows current terms and conditions for the main lines of business)

Germany In Germany, cover is available for almost all weather-related perils, such as windstorm, hail, flood, landslide and snow load, storm and hail being marketed in tandem. It is also possible to insure in addition against flood and other natural hazards, as part of a package in the case of personal lines business and small to medium-sized enterprises, and also individually for industrial risks. The natural hazard cover for which there is most demand is storm/hail. It has also been available for longer than any of the others, and is therefore part of the standard package for most products. Flood and extended natural perils were introduced more recently, gradually gaining a foothold in the private insurance market only after deregulation in 1994. Until then, cover extending beyond windstorm and hail was only available in Baden-Württemberg and throughout the former German Democratic Republic (GDR), where it had been obligatory and was provided by the state insurer. This explains why the insured flood losses were so high in 2002. Market penetration for flood cover is less than 10% in Germany as a whole, and even lower in the case of other natural hazards.

Exclusions (relating to weather risks and property insurance, excluding engineering)

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Windstorm/hail

Flood

Other weather risks

No legally obligatory covers. Art. 3 of Council Directive 92/49/EEC of 18 June 1992 provided that the monopoly which existed in Germany at the time had to end by 1 July 1994. This concerned the Hamburger Feuerkasse’s windstorm insurance monopoly and Baden-Württemberg’s law of 7 March 1960 relating to the compulsory cover of buildings against storms and other natural hazard losses. Residential: approx. 75–80% Commercial/industrial: approx. 20–30% – General terms and conditions of household contents insurance (“VHB 2008”) – General terms and conditions of household buildings insurance (“VGB 2008”) – General terms and conditions of windstorm insurance (“AStB 2008”) – General terms and conditions for the insurance of additional perils under industrial fire policies (“ECB 2008”) – Terms and conditions for the insurance of additional perils under fire business interruption policies for industrial and commercial enterprises (“ECBUB 2008”) – General terms and conditions for comprehensive property and commercial insurance (“VSG 2008”) – General terms and conditions for electronic equipment insurance (“ABE 2008”) – General terms and conditions for erection all risks insurance (“AMoB 2008”) – General terms and conditions for machinery breakdown insurance (“AMB 2008”) – General terms and conditions for machinery business interruption insurance (“AMBUB 2008”) – General terms and conditions of contract works insurance (“ABN 2008” and “ABU 2008”) Residential: <10% Commercial/industrial: <10% – Special terms and conditions for the insurance of additional natural hazards (“BWE 2008”) – General terms and conditions for the insurance of additional perils under industrial fire policies (“ECB 2008”) – Terms and conditions for the insurance of additional perils under fire business interruption policies for industrial and commercial enterprises (“ECBUB 2008”) – General terms and conditions for comprehensive property and commercial insurance (“VSG 2008”) – General terms and conditions for electronic equipment insurance insurance (“ABE 2008”) – General terms and conditions for machinery breakdown insurance (“AMB 2008”) – General terms and conditions for erection all risks insurance (“AMoB 2008”) – General terms and conditions for machinery business interruption insurance (“AMBUB 2008”) – General terms and conditions of contract works insurance (“ABN 2008” and “ABU 2008”) Residential: << 10% Commercial/industrial insurance: << 10% – Special terms and conditions for the insurance of additional natural hazards (“BWE 2008”) – General terms and conditions for the insurance of additional perils under industrial fire policies (“ECB 2008”) – Terms and conditions of insurance for additional perils under fire business interruption policies for industrial and commercial enterprises (“ECBUB 2008”) – General terms and conditions for comprehensive property and commercial insurance (“VSG 2008”) – General terms and conditions for electronic equipment insurance insurance (“ABE 2008”) – General terms and conditions for machinery breakdown insurance (“AMB 2008”) – General terms and conditions for erection all risks insurance (“AMoB 2008”) – General terms and conditions for machinery business interruption insurance (“AMBUB 2008”) – General terms and conditions of contract works insurance (“ABN 2008” and “ABU 2008”)

– Storm surge – Ingress of rain, hail, snow or dirt through windows, external doors, or other openings not properly closed – Avalanche – Loss or damage to buildings or parts of buildings that are not ready for occupancy and to property in such buildings – Loss or damage to movable objects outdoors – Damage to property affixed to the building exterior (e.g. signs, neon displays) – Damage to objects not yet installed or erected and operational or that have not yet successfully undergone trials (erection works) – Damage to shop and display windows (“VGB 2008”)

– Storm surge – Groundwater that has not penetrated to the surface of the ground – Loss or damage to insured objects located in buildings that are not ready for occupancy – Loss or damage to movable objects outdoors

– Flood – Loss or damage to insured objects located in buildings that are not ready for occupancy – Loss or damage to movable objects outdoors – Dryness or drying-out

(Continued overleaf)

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Underwriting aspects

Germany Definitions of perils

Standard deductibles, loss limits, annual aggregate limits (AAL)
Windstorm conditions Deductible VHB None VGB None AStB Max. €500 BWE Loss limit None None None Flood Deductible Loss limit

ECB

€2,500–12,500

Max. €5m AAL**

10% of loss, min. €500, max. €5,000 or 1–5% of sum insured* Max. €50,000**

None

ECBUB

€2,500–25,000

Max. €5m AAL**

Max. €50,000**

ABE AMB AMBUB AMoB ABN ABU

Min. €500 Min. €500 Min. 2–5 days **/*** Min. €500** Min. €500** Min. €500**

None None None Various with turnover policies Various with turnover policies Various with turnover policies

Min. €500 Min. €500 Min. 2–5 days ** Min. €500 Min. €500 Min. €500

None 20% of sum insured, max. €5m** 20% of sum insured, max. €5m** None None None Various with turnover policies Various with turnover policies Various with turnover policies

Deductibles (D)/loss limits (LL)/ annual aggregate limits (AAL) Zoning

Specific market features

* According to a survey by the German Insurance Association. ** More for industrial risks, depending on the individual case. *** Substantially higher deductible in the case of project business interruption.

Austria In Austria, private insurance companies cover windstorm, rockfall, falling stones, landslide, hail and snow load. Following floods in 2002 and 2005, there has been an increase in the number of products covering natural hazards including flood. First-loss covers are frequently utilised, loss limits being relatively modest (for example €4,000 or €8,000). Sublimits under commercial and industrial policies are often expressed as a percentage of the sum insured. Another feature specific to Austria is a national disaster fund financed out of tax income. It provides aid in the event of natural hazard occurrences of exceptional proportions. The primary beneficiaries are private households, but there is no legal entitlement to benefit. Moves are now afoot to significantly extend the scope of natural hazard cover by introducing higher limits and achieving greater market penetration.

Austria Obligatory cover Market penetration

Insurance terms and conditions Available covers

Main exclusions

Definitions of perils

Specific market features

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Munich Re Weather risks in central Europe

Windstorm/hail – Windstorm is a weather-related air movement of at least force 8 on the Beaufort Scale (min. 63 km/h). – Hail is solid precipitation in the form of ice pellets.

Flood – Flood is inundation of the insured premises by substantial quantities of surface water due to a) the bursting of the banks of surface (still or flowing) bodies of water, b) precipitation, c) the emergence of groundwater at the surface as a result of a) or b). – Backwater means that, contrary to the intended purpose, water enters a building through drainage pipes, or installations connected to such pipes, when surface (standing or flowing) bodies of water burst their banks, or as a result of precipitation. See table on the left

Other weather risks – Landslide is the natural slide or fall of earth or rock masses. – Snow load is the effect of the weight of snow or ice masses. – Avalanches are snow or ice masses that descend the side of a mountain.

See table on the left

See table on the left (as for flood)

Two zones, broken down by postcode

Four ZÜRS exposure classes (ZÜRS: zoning system for flooding, backwater and heavy rain) Storm surge excluded

No zoning available

Storm surge excluded

Windstorm/hail No Residential: approx. 80% Commercial/industrial: approx. 20–30% Separate conditions for windstorm and hail

Flood No Residential: approx. 40–50% Commercial/industrial: approx. 20–30% Specific conditions for natural hazard insurance Household, owner-occupied housing, commercial, industrial, etc. Losses caused solely by the rise of a water table. Flood is the inundation of the insured premises.

Other weather risks No Residential: approx. 40–50% Commercial/industrial: approx. 20–30% Specific conditions applicable to natural hazard insurance Household, owner-occupied housing, commercial, industrial, etc.

Household, owner-occupied housing, commercial, industrial, etc. Avalanche, storm surge, flood, inundation

Wind speeds of over 60 km/h

Flood debris accumulation is caused by mass movements of soil, water, mud, and other components triggered by the natural effects of water. No insurance pool

No insurance pool

Terrain model (Hora)

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Underwriting aspects

Switzerland Obligatory cover Market penetration

Switzerland Under Swiss legislation, fire policies also have to cover natural hazard risks with the exception of earthquake. Natural perils are covered by public-legal monopolies in 19 out of 26 Swiss cantons and by private insurers in the remaining seven. The rates for elementary (natural) perils cover are fixed by the state. The cantonal monopolies pool their natural hazard losses via the Intercantonal Reinsurance Union, the equivalent for private insurers being the Swiss Natural Perils Pool. Under both systems the combined, aggregate losses (net of reinsurance) are refunded to the relevant monopolies or private insurance companies in accordance with a predefined breakdown. These pools, which require a high degree of solidarity between insurers, have worked successfully for a number of decades.

Insurance terms and conditions Available covers Main exclusions

Definitions of perils

Specific market features

Czech Republic and Slovak Republic Natural hazards were included as part of basic cover for personal lines policyholders in the Czech Republic and in the Slovak Republic until the 1990s, with sums insured in the order of a few thousand euros. Deductibles were rarely applied under private household buildings and contents policies. Sums insured for natural hazards under commercial and industrial policies depend on the type of business, the location, and the other risk parameters that apply in the individual case. If there is above-average exposure to natural hazards, individual occurrence limits or maximum exposure limits are imposed. Deductibles can be as high as 10%, but are generally lower. Following the flood events of 1997 (primarily in Moravia) and August 2002 (mainly affecting the Vltava and Elbe river basins) there were proposals in the Czech Republic to ensure that the terms and conditions of flood and inundation policies were more commensurate with the risks, for instance by reducing loss limits and increasing deductibles. At the same time, substantial amounts were invested in measures designed to prevent or mitigate losses. Increasingly, rates in both countries (for private buildings and contents insurance as well) are more in line with the individual risk parameters. Thus, policyholders living on exposed rivers will have to accept higher premiums and/or deductibles and lower indemnity amounts than in the past.

Czech Republic and Slovak Republic Obligatory cover Market penetration

Insurance terms and conditions

Available covers

Most frequent exclusions

Definitions of perils

Deductibles

Specific market features

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Munich Re Weather risks in central Europe

Windstorm/hail Obligatory under fire policies Approx. 100% Same as the fire sum insured

Flood Obligatory, under fire policies Approx. 100% Same as the fire sum insured

Other weather risks Obligatory under fire policies Approx. 100% Same as the fire sum insured

Under the fire insurance policy Avalanche, storm surge, flood, inundation

Under the fire insurance policy Losses caused solely by the rise of a water table Flood is the inundation of the insured premises.

Under the fire insurance policy

Wind speeds of over 75 km/h

Flood debris accumulation is caused by mass movements of soil, water, mud and other components and is triggered by the natural effects of water. Intercantonal Reinsurance Union, Swiss Natural Perils Pool

Intercantonal Reinsurance Union (IRV), Swiss Natural Perils Pool

Intercantonal Reinsurance Union, Swiss Natural Perils Pool

Windstorm/hail

Flood

Other weather risks

No Residential: over 90% Commercial lines: over 50% Industrial lines: over 80% General terms and conditions for natural hazards, terms and conditions for commercial and industrial enterprises Buildings and contents insurance, insurance for commercial and industrial enterprises, engineering, etc. General exclusions (e.g. unfinished buildings under buildings insurance) Windstorm is the dynamic effect of an air mass on the insured premises and is defined as being at least force 8 on the Beaufort Scale (wind speeds 62–74 km/h) at the insured property. Residential: approx. €25 Commercial lines: approx. €250 Industrial lines: approx. €7,500 No insurance pool

No Residential: over 90% Commercial lines: over 20% Industrial lines: over 40% General terms and conditions for natural hazards, terms and conditions for commercial and industrial enterprises Buildings and contents insurance, insurance for commercial and industrial enterprises, engineering, etc. General exclusions (e.g. unfinished buildings under buildings insurance) Flood constitutes an incursion of water that remains in or flows through the insured location for a given period of time.

No Residential: over 90% Commercial lines: over 20% Industrial lines: over 40% General terms and conditions for natural hazards, terms and conditions for commercial and industrial enterprises Buildings and contents insurance, insurance for commercial and industrial enterprises, engineering, etc. General exclusions (e.g. unfinished buildings under buildings insurance) Landslide signifies the movement of stones or earth masses from a higher to a lower location due to natural hazards.

Residential: approx. €25 Commercial lines: approx. €250 Industrial lines: approx. €7,500 No insurance pool

Residential: approx. €25 Commercial lines: approx. €250 Industrial lines: approx. €7,500 No insurance pool

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Underwriting aspects

Slovenia Obligatory cover

Slovenia Windstorm and hail are included in the basic cover in Slovenia. They are covered under all private property policies without loss limit. Commercial and industrial policyholders also have windstorm and hail cover for the most part. Losses incurred in the past along the Sava and Drava rivers have increased demand for other natural hazard covers such as flood. However, market penetration in Slovenia remains low compared with other countries. In general, loss limits and deductibles are not common under private buildings and contents policies. In the case of commercial and industrial risks, the normal practice is to assess the specific risk, maximum loss limits and/or deductibles being based on the particular risk parameters (e.g. location, concentration of values, vulnerability). Flash floods that trigger landslides are becoming more common in Slovenia due to climate change and topographical factors. This could bolster demand across the board for cover of weather risks other than windstorm, hail and flood.

Market penetration

Insurance terms and conditions

Available covers

Most frequent exclusions

Definitions of perils

Deductibles

Specific market features

Italy Private insurance companies normally include storm and hail cover under the fire policy. Flood cover is rarely granted to private households. Whilst it can be covered under commercial and industrial policies, it is not available on a stand-alone basis but included under the fire policy, subject in most cases to loss limits. Private individuals who live in a designated disaster area can apply for state compensation. The scheme has only been used for flood and earthquake events in the past, but not as yet for windstorm events. Flood risk zoning will be available from 2008, which is when SIGRA, a project to develop software for assessing the flood exposure of individual risks or portfolios, is due for completion. It will include the flood plains of all Italy’s major rivers and is also expected to be made available to the insurance industry in the course of 2008.

Italy Obligatory cover Market penetration

Insurance terms and conditions

Deductibles

Available covers

Main exclusions

Perils covered

Specific market features

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Munich Re Weather risks in central Europe

Windstorm/hail No Residential: 100% Commercial lines: over 90% Industrial lines: over 90% General terms and conditions for fire and household insurance, terms and conditions for commercial and industrial enterprises Buildings and contents insurance, insurance for commercial and industrial enterprises, engineering, etc. General exclusions (e.g. unfinished buildings under buildings insurance) Windstorm is a weather-related air mass with a wind speed of more than 60km/h at the insured premises.

Flood No Residential: 50% Commercial lines: 5% Industrial lines: 10% General terms and conditions for fire and household insurance, terms and conditions for commercial and industrial enterprises Buildings and contents insurance, insurance for commercial and industrial enterprises, engineering, etc. General exclusions (e.g. unfinished buildings under buildings insurance) Flood is the accumulation of enormous water masses, caused by exceptional rainfall, that exceed the capacity of the water systems or are not able to drain away. Residential: €0 Commercial lines: €0 Industrial lines: €0 No insurance pool

Other weather risks No Residential: 50% Commercial lines: 5% Industrial lines: 10% General terms and conditions for fire and household insurance, terms and conditions for commercial and industrial enterprises Buildings and contents insurance, insurance for commercial and industrial enterprises, engineering, etc. General exclusions (e.g. unfinished buildings under buildings insurance) Landslide signifies the movement of stones or earth masses from a higher to a lower location due to natural hazards.

Residential: €0 Commercial lines: €0 Industrial lines: €0 No insurance pool

Residential: €0 Commercial lines: €0 Industrial lines: €0 No insurance pool

Windstorm/hail No Residential: 20–30% Small, medium-sized industrial: 60–80% Large industrial: over 95%

Flood No Residential: No, only in exceptional instances, very high premiums Small, medium-sized industrial: 60–80% Large industrial: over 95% Specific natural hazard insurance terms and conditions, included in the fire policy

Other weather risks No Residential: No Small, medium-sized industrial: 60–80% Large industrial: over 95%

No separate terms and conditions for windstorm and hail; included in the fire policy Household, owner-occupied housing, commercial, industrial Yes, depending on the type of risk in the individual case Earth movement, volcanic eruption, seaquake, inundation, flood, ingress of salt water, landslide; also exclusion of specific parts of buildings e.g. chimneys, antennae, satellite dishes, solar installations

Specific natural hazard insurance terms and conditions, included in the fire policy

Commercial, industrial: Sublimit often 50% of the fire sum insured Yes, depending on the type of risk in the individual case Heavy seas, high and low tide, seaquake, landslide, subsidence, local landslide, humidity, dripping, infiltration of dampness through walls (literally exudation), infiltration; original version: “mareggiata, marea, maremoto, frana, cedimento, smottamento, umidità, stillicidio, trasudamento, infiltrazione” Flood, alluvial deposits, static flood/ dampness also caused by earthquake; original version: “inondazioni, alluvioni, allagamento/bagnamento anche causato da terremoto”

Commercial and industrial insurance: Sublimit often 50% of the fire sum insured Yes, applied according to the individual risk type Static flood (water is not flowing), earthquake, avalanche, volcanic eruption, dampness, dripping, infiltration of dampness via walls (literally exudation), infiltration; original version: “allagamenti, terremoto, slavine, valanghe, eruzione vulcanica, umidità, stillicidio, trasudamento, infiltrazioni” Local landslide, landslide, subsidence; original version: “smottamenti, franamenti, cedimenti del terreno”

Weather event: (1) Hurricane, wind, windstorm, thunderstorm, hailstorm, tornado; original version: (1) “Uragano, vento e cose da esso trascinate, bufera, tempesta, grandine, tromba d‘aria ed altre simili manifestazioni atmosferiche”; (2) Moisture due to hailstorms, snowmelt No insurance pool

No insurance pool Residential: State compensation if the event is designated a disaster, no clear definition Commercial and industrial: Insurance solution only when SIGRA risk zoning available in 2008

No insurance pool Residential: State compensation if the event is designated a disaster, no clear definition Commercial and industrial: Insurance solution only

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Agricultural insurance

Reduced agricultural yields substantially increase insurers’ loss ratios in individual years. Farmers pay the price. Increasing weather extremes in Europe, such as prolonged hot spells, severe hailstorms or flash floods, put strains on agriculture. Demand for the cover of crop failure due to natural hazards is growing. Many European countries have a state subsidy system under which ad-hoc payments are made for uninsurable crop losses caused by natural hazard events. Although, in the event of an officially designated natural disaster, direct payments of this kind reduce the losses sustained by farmers in the area affected, the system is not particularly efficient for a number of reasons: compensation amounts lack transparency and depend on the budget of the country concerned; farmers have no legal right to payment; the administrative effort involved is extremely high, resulting in considerable payment delays and liquidity problems for the farms; compensation tends to be insufficient, often constituting a mere fraction of the actual loss.

One alternative is a comprehensive crop insurance scheme covering individual farmers against reductions in yield. This type of system, which allows farmers to actively manage the risk, is found mainly in the USA and Canada, but has also been introduced in Spain and Portugal. In the event of loss, the farmer is legally entitled to the insured yield amount for that particular farm, payment being made immediately after the loss has occurred.

Loss caused by drought at a vineyard.

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Risk-partnership role models
Extended cover options are already available in some central European countries. Austria has one of Europe’s most comprehensive crop insurance systems. The insured natural hazards include hail, frost, windstorm, flood, drought, prolonged rain at harvest time and other perils. The state grants a 50% premium subsidy. The country’s main crops are insured, including winter cereals, fruit and vines. Farmers in the Czech Republic and in the Slovak Republic can also insure standard crops such as wheat, oleaginous fruits, fruit and vines against hailstorm, fire, windstorm, flood, and landslide. The state pays 30% of the basic premium in the Czech Republic and 50% in the Slovak Republic. Plans have already been initiated in Italy to develop multi-peril cover going beyond hailstorm insurance, the relevant legal basis having been established in 2004. The model is, at present, still at the pilot stage. Farmers can use the system, under which the state grants a 50% premium subsidy as in Austria, to insure against crop failure due to hailstorm, windstorm, freeze, frost and drought.

Systems in the different countries
Yield reductions due to natural hazards can produce high loss ratios for the insurance industry in individual years. Insurance premiums are therefore often beyond farmers’ financial means, and state support is generally indispensable. Premium subsidies reduce the financial strains on farmers, who are then more willing to take out insurance, the net result being that market penetration, regional diversification and risk spread increase. In the USA, some 60% of agricultural insurance premiums are subsidised, and approximately 80% of agricultural land is insured against crop failure due to natural hazards. The German Insurance Association has produced a draft for multi-peril crop insurance. Again, this is based on a system of state subsidies, although corresponding legislation would have to be passed. Farmers can insure against crop failure due to hailstorms, but there is currently no comprehensive cover which includes all the relevant natural hazards. Hail insurance with optional limited windstorm, flood and other covers is also available in Switzerland. However, there is no comprehensive, statesubsidised multi-peril crop insurance as such.

Risk partnership between farmers, insurers and state
The USA’s unique insurance system shows that the key to successful cover is risk partnership between farmers, insurers and the state. The development of multi-peril crop insurance is becoming increasingly important to agriculture due to the growing number of extreme weather events in Europe. Some countries are already considering a change of approach and this line must now be pursued even more vigorously. The main objective is to achieve an efficient allocation of the available resources, which involves using state funds to subsidise agricultural insurance premiums rather than channelling them into direct and ad-hoc payments. Provided such systems are backed by the necessary legislation, farmers will have a secure, long-term, active risk-management tool.

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Motor accidental damage (AD) insurance

Hail is an event which leaves a definite mark on motor AD insurance. However, market penetration varies considerably – from around 90% in Switzerland to only 20% in Italy. Hail is one of the costliest natural catastrophes where motor AD insurance is concerned. Moreover, in the countries reviewed, hail events are among the most important and, at the same time, best insured weather extremes. The main classes of business which include hail cover are motor and property. This can be seen from the hailstorm which swept across Munich on 12 July 1984. Of the DM 1.5bn overall losses, motor policies accounted for more than DM 800m and property insurance more than DM 300m, the remainder consisting of damage to aircraft and agriculture losses. The principal reason for the high motor AD exposure is that vehicles can be damaged by hailstones of just 2 cm in diameter, whereas damage to buildings results only if the hail measures more than about 4 cm. Hail cover is very widespread in property insurance, often being included with windstorm or fire. In the case of motor insurance, on the other hand, market penetration varies considerably owing to differences in consumer attitude. In Switzerland more than 90% of registered vehicles are insured against hail, in Germany over 75%, and in Italy a mere 20%.

Future loss potential
Worldwide, there has been a sharp increase in catastrophic losses for insurers in recent decades, weather extremes accounting for five out of six natural catastrophes. Extreme weather events are also clearly the main cause of natural hazard losses under motor policies. Many atmospheric and hydrospheric processes will produce record losses as a result of climate change, and the probability of major losses will likewise increase. Furthermore, growing urbanisation will mean greater value concentrations, particularly with regard to motor vehicles, and higher losses. The insurance industry will therefore have to brace itself to deal with new record-breaking events, and motor accumulation loss frequencies and amounts will consequently increase. The new situation will lead to changes in cover (e.g. deductibles, approved repairer schemes).

Since motor vehicles can be damaged by hailstones of just 2 cm in diameter (compared with 4 cm in the case of buildings) hail often proves a very expensive event for motor insurers.

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Underwriting aspects

Level of the Rhine at an all-time low (26 September 2003).

Marine insurance Marine risks – On water and on land
Whether in the Baltic, in the Mediterranean or on inland waterways, the transport of goods by water is exposed to special perils in central Europe as elsewhere. The weather, in particular, takes its toll. Although the Mediterranean basin enjoys a temperate climate, violent storms can occur here, too. In addition, shipping in the Bosporus has grown substantially following the opening-up of the former Soviet Union. This combination of bad weather and an increase in traffic is having a negative impact on safety.

Baltic Sea – Fog and freezing conditions
The shipment of goods plays a key role in our globalised economy, with its international division of labour. According to the World Trade Organization, the annual increase in the volume of international trade currently outstrips the growth in worldwide GDP (2005: 6%, 2004: 9.5%). As the volume of trade increases so, too, does the number of shipments. The new EU member states are also making their presence felt, and the focus of cargo movements within central Europe is shifting from west to east. Another reason for the greater volume of trade is growing demand for fossil fuels. Accidents are a regular occurrence in the Baltic due to the huge volumes of traffic at various critical shipping points, a situation further aggravated by weather conditions. The principal risk to shipping is not so much extreme windstorms, as in the Atlantic, but a combination of frequent and sudden fog and bad weather. The prolonged winter cold spells, too, are fraught with hazard, loss potential also being higher because, in many cases, due to high freight rates and lack of appropriate vessels, the ships do not have ice-class hulls.
1

North Sea and Baltic – Millions of transshipments
Cargo can be affected by adverse weather conditions even when the sea voyage has ended. On reaching port, for example, it is exposed to high winds and storm surges in transhipment facilities. Transshipments handled by Germany’s North Sea and Baltic ports have risen by 17% in volume, showing how crucial such facilities are to meet demand. Storage capacity is constantly being increased: the new JadeWeserPort container terminal in Wilhelmshaven, for instance, the CT 4 terminal extension in Bremerhaven and Hamburg’s new, fully automated Altenwerder container terminal (combined total capacity of 12m TEU annually1). The concentration of values at storage sites is growing rapidly as a result of this impressive expansion in existing port facilities.

http://www.bremenports.de/ and http://www.terminal-altenwerder.com/CTA_Containerterminal.59.0.html. Munich Re Weather risks in central Europe

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Storage areas are also constantly being extended to cope with the boom in vehicle imports and exports. Currently, vehicle storage facilities in port areas such as Bremerhaven have a capacity of up to 120,000 vehicles. Loss exposure and the potential for major losses due to water, hail or high winds are accordingly high. Inland warehouses and vehicle storage sites are also increasingly exposed to flood risks, as shown by the floods that affected many parts of Europe in 2002. Aggregate market losses at vehicle storage sites alone were in the order of US$ 35m. In summer, such facilities are exposed to the risk of hail, whilst snow damage to the hail nets in winter can also result in severe damage to vehicles. Moreover, natural events have tended to occur at completely unexpected locations in the past few years, for instance hail on the North Sea coast. Good risk assessment, adequate rates and efficient risk-accumulation management are therefore absolutely indispensable to the insurance industry.

Inland shipping losses
Another link in Europe’s global logistics chain that has been hit by weather extremes in the past few years is inland shipping. This was demonstrated by the high water levels and raging floods of summer 2002, and by contrast the low water levels and narrow fairways during the same period in 2003 and 2006. Entire stretches of European inland waterways had to be closed to shipping for weeks due to exceptional weather conditions – resulting in significant loss of revenue. However, the financial losses sustained by the inland shipping sector were covered under loss of hire, trade disruption and marine consequential loss policies, and thus transferred to the insurance industry. This highlighted the need to define occurrence in a way that clarifies the temporal and geographical allocation of losses. However, annual aggregate limits per policy are also required in order to limit accumulations. These two measures will help to safeguard the position of the insurance industry.2

Hedging weather risks via the capital markets
The loss potential from weather-related natural catastrophes has now reached a critical point as regards amount and severity, which poses new challenges for the insurance industry. Munich Re, like all leading international reinsurers, is exposed to the accumulation loss issue and resulting loss potential. The way forward lies in exploring alternative methods of risk transfer and exploiting the virtually inexhaustible capacity of the international capital markets to absorb such risks. The convergence of the (re)insurance and capital markets has given rise to new risk transfer tools, modelled on established capital market instruments. The catastrophe bond market has experienced spectacular growth, particularly since Hurricane Katrina. Some US$ 5bn worth of catastrophe risk bonds were issued in 2006, double the 2005 figure. Experts believe that, in the medium term, up to 20% of catastrophe risk capacity could be placed on the capital markets. Catastrophe risks are also traded as insurance derivatives. These can be purchased to mitigate the financial impact of bad weather.

2

Detailed article in Schadenspiegel 3/2005 special feature issue on water, pp. 14–17. Munich Re Weather risks in central Europe

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Underwriting aspects

Principal-at-risk bonds, in which the full nominal value of the bond is at risk, have now established a foothold in the market. In order to satisfy the risk appetites of a variety of investors, the risk is tranched into a number of bonds, each with different risk profiles or occurrence probabilities (corresponding to layers). The most important structuring aspect of catastrophe bond issues is doubtless the choice of loss trigger on which payment is based. Parametric triggers are based on the cause of loss, such as wind speeds recorded in a windstorm. An index has been set up for windstorm Europe, based on recorded wind speeds exceeding a threshold value (e.g. 27 m/s). In western Europe alone (the United Kingdom, France, the Netherlands, Belgium, Germany), data is available from some 600 weather stations. The recorded wind speeds are interpolated into CRESTA zones, weighted by loss exposure, so that insured losses can be estimated. Market loss triggers are based on reported insured losses. The only market loss trigger currently in use is the PCS Index for the USA, now the market standard for hurricane catastrophe bonds. Modelled loss triggers simulate losses to a notional portfolio. Indemnity triggers are based on the actual financial losses sustained by the sponsor when a loss occurs. However, this alternative, which is tailored to the sponsor’s need to cover the original loss, is less popular with investors, parametric and market loss triggers being considered more transparent and clear-cut. Insurance derivatives have to be based on a synthetic trigger (parametric or market loss). In the case of swaps, the cedant pays the investor a fixed-rate premium and receives a floating-rate payment in return if a defined loss event occurs. Transferring risk to the capital markets offers advantages to sponsors (alternative forms of capacity in markets where it is becoming more scarce) and investors (uncorrelated investment class with attractive earnings). Munich Re itself uses catastrophe bonds to hedge against weather-related natural catastrophes (windstorm Europe, hurricane USA). Munich Re’s Risk Trading Unit advises and assists clients on the transfer of risks to the capital markets, from structuring to placement. Key factors in the successful handling of our clients’ transactions are Munich Re’s balance sheet and its risk-bearing capacity.

With the current securitisation model, the insurance company, as sponsor of the transaction, concludes a reinsurance treaty with a reinsurer. The reinsurer transfers the risk to a special purpose vehicle by means of a retrocession agreement. The special purpose company issues a bond to cover any liabilities that may arise under the retrocession agreement. A collateral trust invests the corresponding proceeds in bonds with a top credit rating. The funds are managed by a trustee, whose duty it is to ensure that they are properly invested. The assets of the collateral trust function as security for the special purpose company’s contingent liabilities, first-class backing for the policyholder’s cover. A total return swap is purchased to ensure that returns on investments made by the collateral trust bear interest at LIBOR or EURIBOR. The reinsurance and retrocession premiums are passed on to the investors in the form of a spread above LIBOR or EURIBOR, this being the real incentive for investing in the bond. However, risk can be transferred by means of a financial contract as well as a reinsurance and retrocession agreement. Following Katrina, the spread on securitised catastrophe risks, particularly for peak scenarios such as hurricane USA, increased substantially after a period during which prices had been steadily falling. Thus, the capital markets and the traditional reinsurance markets were not dissociated, prices in both having kept pace with each other. Although transactions were initially confined mainly to top-layer risks, it is now possible to place risks with lower return periods (25–30 years).

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Underwriting aspects

Risk can be transferred on the basis of accumulated values throughout the relevant period or by counting the days which fulfil a certain criterion, such as a maximum temperature of 31°C. The predefined payment is either made in full once the trigger value has been reached, or in stages that correspond to each additional day on which the maximum temperature is 31°C, for example. Munich Re offers both insurance and derivative solutions tailored to the needs of the individual company. The key difference between the two solutions is that derivatives have to be valued at a specific date and shown in the balance sheet, whereas insurance premiums can be written off as an expense. Furthermore, the need to have an insurable interest does not apply in the case of derivatives, which are purely financial transactions. Thus, the client may receive a payment even if no loss has been sustained. In both cases, the clients bear the basis risk that, even though they may suffer a loss, no compensation will be paid if the weather cover is not triggered. Therefore, it is very much in the client’s interests that an analysis be performed of the precise extent to which its business is affected by the weather, and that the index and trigger selected match its exposure. The energy sector is very much at the mercy of the weather, with average energy consumption being reduced both by falling demand for heating in a mild winter and for air-conditioning in a cool summer. Fluctuations in demand caused by the weather are a major volume risk and, unlike price risks, cannot be covered on the energy exchanges. This is where standardised weather derivatives can help, since they are specifically designed to deal with this type of exposure. They are based on temperature indices, referred to as heating degree days (HDD) for the winter period and cooling degree days (CDD) for the summer. The indices measure daily deviations from a reference temperature of 65°F (approx. 18.3°C) throughout the season. The weather derivatives market has experienced massive growth throughout the past decade, mainly in response to demand from utility companies. Contracts are traded on the exchanges and over the counter, either directly between the parties involved or through a broker. A PricewaterhouseCoopers survey commissioned by the Weather Risk Management Association found that over a million contracts, primarily relating to major US conurbations, had been traded on the Chicago Mercantile Exchange in 2005/6. Apart from utility companies, banks, (re)insurance companies, and hedge funds also trade on the market. Their objectives vary from the desire to obtain direct cover for their own exposure or achieve a wider geographical spread, to the wish to take advantage of arbitrage opportunities.

Weather insurance
Cover against weather-related natural catastrophes is also available in the form of weather insurance. Over two thirds of the world’s economy is directly or indirectly dependent on atmospheric conditions. Companies can protect themselves against the financial consequences of unfavourable weather conditions by purchasing weather insurance or weather derivatives based on parametric triggers. These provide compensation for loss of revenue or additional costs. Risk awareness in general is increasing because of climate change and the growing importance companies attach to risk management. As a result, the number of products offering protection against losses due to unexpected and exceptional weather conditions is steadily growing. Creativity knows almost no bounds when it comes to structuring weather covers, and a wide range of concepts is on offer. They may be based on temperature, precipitation (rain/snow), sunshine hours, wind or a combination of values recorded at independent, official weather stations, operated for the most part by public bodies such as Germany’s Weather Service. The risk is analysed and modelled using statistics collated over a period of twenty years or more. Thus, expected losses and volatility can be established and trends identified.

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No need for event organisers to get their feet wet (photo shows the centre court at the Steffi Graf Stadium in Berlin). Weather insurance or derivatives will shelter them from the financial consequences of adverse climate conditions.

Utility companies are sensitive to the weather on the production side as well as the consumer side. For instance, shortages of water during periods of drought are a problem for hydroelectric power stations, and even nuclear power stations can be forced to close down if there is a lack of coolant. If power grids are overloaded by constant use of air conditioners, this can result in supply shortages or even power cuts. By contrast, since photovoltaic systems require adequate amounts of daily sunshine, the corresponding solutions could be based on global solar radiation indices. Weather insurance in this context generally covers investment projects and the loans granted to finance them. Other branches of the economy that rely on the weather are agriculture and tourism. Many ski areas reported a sharp fall in turnover as a result of the extremely mild 2006/7 winter. At the same time, local authorities had cause to celebrate because they saved money on snow clearance. Building firms, which can face the problem of enforced inactivity or even incur penalty payments during harsh winters, also reaped the benefits. On the other hand, ice cream and drinks manufacturers and outdoor sectors such as beer gardens, leisure parks and swimming pools, profit from a hot summer. By contrast, sales of summer clothing scarcely benefit from hot weather as people tend to stay away from the shops when the temperature soars, despite air-conditioning. The drought that accompanies periods of hot weather can also cause crop failures and increase the risk of wildfires, whilst inland shipping may be hit by falling water levels.

It has, for some time now, been possible to insure sports and music events not only against natural catastrophes such as windstorm but also against adverse weather. Classical open-air concerts are especially vulnerable, because the musical instruments must on no account be exposed to rain. If persistent rain disrupts major tennis tournaments like the French Open, finals may have to be postponed instead of being played at lucrative, weekend peak periods. For this reason, organisers will often opt for cancellation-of-events insurance including adverse weather cover, which indemnifies additional costs or loss of revenue if precipitation exceeds a certain number of millimetres.

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Summary
Climate change is no longer to be disputed. According to the latest findings, natural events will be more extreme due to the resultant global warming – not only in the Gulf of Mexico and on the east coast of the United States but here in central Europe as well. We face the prospect of heavier winter storms, more devastating floods, and longer dry spells than ever before. The fact that the frequency of such scenarios as winter storms is not increasing can be of little consolation compared with the growing severity and frequency of local events like heavy precipitation, thunderstorms and hail. The insurance industry doubtless faces heavier loss burdens. At the same time, demand for private and commercial insurance is expected to rise, with utility and shipping companies insuring against the risk of low water levels during hot spells, for instance, and sectors where turnover is especially prone to seasonal weather conditions purchasing more weather derivatives. Although now well established in the USA, this form of cover is rare in central Europe, perhaps owing to the historical absence of extreme events. Demand for natural hazard extensions will also grow in personal lines business, as people become more aware of the risks of snow load and heavy precipitation in many areas of central Europe. Global warming constitutes both a risk and an opportunity for the insurance industry. From either perspective, the challenges the industry faces are many and varied, but not insurmountable provided the tried and tested principles are respected: risk identification, risk assessment, adequate cover at an appropriate price. We are, however, less and less able to rely on historical events and experience as a guide. We will have to make more use of scenarios to simulate future developments, and models will be applied on a wider scale. Complete transparency of individual risks will be absolutely essential and geocoded risk data the norm. Underwriting controls will be necessary to avoid local accumulations. Policy terms and conditions and extensions will have to be crystal clear. The more imprecise the terms and conditions and the more limited the loss experience, the greater the fluctuations in losses from extreme events. Apart from the purely underwriting aspects, it is fundamentally important that policyholders and insurers recognise their community of interests. This means above all that policyholders regard natural hazard cover as a means of protection against major financial loss, not a “money swap”. The insurance industry has to ensure that people appreciate this fact in order to prepare the ground for appropriate deductibles. Insurance companies will have to promote and reward active risk management and loss prevention. The authorities, too, have a part to play in this, by not granting construction permits in high-flood-risk areas and by introducing more stringent building codes. Munich Re has the expertise and resources to assist clients with their insurance, risk analysis and risk management concerns. We will be happy to advise you on a range of risk transfer alternatives – from traditional reinsurance to catastrophe bonds and derivatives.

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Munich Re Weather risks in central Europe

Geo services – Client services
CatLossEstimation Service: Using geocoding to visualise losses
Insured market losses due to severe weather run into billions each year in Europe. Winter storms and hailstorms can leave a trail of catastrophe and trigger a flood of insurance claims. Munich Re’s CatLossEstimation Service promotes proactive claims management by using modern geoinformation technology and address geocoding techniques to forecast losses. Insurers can establish the potential impact of a windstorm or thunderstorm on their portfolios in less than 48 hours. The service also facilitates claims handling and accumulation control. Modern natural hazard loss management Following a windstorm or hailstorm, the CatLossEstimation Service compares portfolio and weather data by combining the storm input with the geocoded risk details. Thus, insurers can estimate losses and potential accumulations before the actual surge of claims notifications arrives. Moreover, having such detailed information at their disposal at an early stage facilitates contacts with policyholders, and hence claims management, in the immediate aftermath of the event. Besides forecasting losses, the Adjuster Index Module incorporated in the CatLossEstimation Service provides details of local loss amounts. Postcode-based analyses enable cedants to optimise coordination of loss adjusters and deploy them in the areas worst affected. The analyses are presented in the form of charts and tables. The data include both risk location details and sums insured, so that cedants can establish whether the risks affected are large or small. Beating the fraudsters The service also helps to detect attempted fraud. Claims technicians can quickly identify on a map whether a reported loss is well outside the storm field, and decide if an invoice can be settled without further enquiries or if adjusters should be appointed. The CatLossEstimation Service also produces portfolio analyses, performing an additional quality control by highlighting discrepancies in the portfolio. It can, for example, identify risks with incorrect street names or postcodes or sums insured that exceed a certain limit.

CatLossEstimation: The technology behind the service Initially, the cedant forwards precise details of all risk addresses in the portfolio to Munich Re for geocoding – i.e. determining the latitude and longitude coordinates for each risk. Use of a virtual project room, accessible via the client portal, facilitates communications between the insurer and Munich Re. This facility guarantees secure data-sharing and advises major changes by e-mail. Following a storm, the storm field and the geocoded client portfolio are linked and both datasets compared. In this way, the risks that are relevant for insurance and loss purposes, namely those affected by winds of a minimum Force 8 on the Beaufort Scale, can be filtered out. The extent to which a portfolio has been impacted can be determined from the wind speeds and sums insured. Evaluations are available one to three days after a storm. A few weeks after the event and further to processing of the claims notifications, the insurer advises the actual loss burden and affected risks. The CatLossEstimation Service links these data with the forecasts made previously to establish the specific characteristics of the portfolio. Each new loss event produces a more detailed analysis.

Capable of making a big impact: hailstones the size of golf balls (Moses, New Mexico).

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Geo services

MR NatCatSERVICE

The service we offer NatCatSERVICE is the central element of Munich Re’s Geo Risks Research. Founded in 1974, it is now one of the most comprehensive natural catastrophe databases in existence. Each year, we analyse and document over 700 events. The database currently has more than 25,000 entries. It contains data on the major catastrophes of the last 2,000 years and on all post-1980 loss events. Information on individual events is available on our online platform, NATHAN. Up-to-date charts and analyses can be downloaded at www.munichre.com/ geo.

NATHAN

The service we offer NATHAN is an online platform which supplies comprehensive information on natural hazards, historical catastrophes, and countries. Interactive maps provide information on natural hazard situations anywhere in the world. Key features: – Interactive dialogue with Munich Re’s natural hazard maps – Identification of 600,000 cities worldwide and their natural hazard exposures – Identification of CRESTA zones – Up-to-date catalogue of worldwide catastrophes, including information on overall and insured losses – Country profiles, with information on geography, economy, population and insurance markets – NATHAN is available in two versions. The internet version can be accessed at www.munichre.com/nathan. Clients can access a more detailed version at connect.munichre.com.

MRCatPML SERVICE

The service we offer Munich Re’s MRCatPML SERVICE prepares analyses of potential earthquake, storm, and flood accumulation losses based on insurance companies’ risk details (using the CRESTA system or on an address basis) broken down by geographical location and risk category. Key features: – Natural catastrophe PML analyses – Simulation of historical or hypothetical catastrophe scenarios – Estimates of the impact of catastrophe scenarios on individual portfolios – Probabilistic analyses and cartographic representations – Analyses of earthquake, storm and flood risks

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Munich Re Weather risks in central Europe

MRGlobalLocationFinder

The service we offer MRGlobalLocationFinder geocodes individual risk locations by address in 20 countries (Europe, USA) and by locality worldwide. Key features: – Automatic representation of the geographical coordinates of all (risk) locations in the portfolio – Analysis of portfolio quality (identification and rectification of incorrect risk addresses) – Greater transparency, better risk management – Enhanced risk-modelling and accumulation control – Multi-location policy capability (identification of all individual risks) – Secure data-sharing in Munich Re’s client portal (connect.munichre.com)

MRGAP SERVICE

The service we offer MRGAP SERVICE facilitates natural catastrophe risk assessment and identifies exposure accumulations in clients’ property portfolios. GAP stands for Geographical Assessment of Portfolios. Key features: – Innovation: High-level transparency and visualisation for risk assessment and accumulation support – Worldwide evaluation of natural catastrophe hazard potential for regional and global portfolios – Portfolio identification and cartographic representation (based on maps or satellite images) according to optional parameters (such as sum insured, class of business, client) – Support for proactive risk management (e.g. by identifying hot spots and clusters) and highlighting of business potential – Automatic identification of CRESTA zones (accumulation control) – Secure data-sharing via Munich Re’s client portal (connect.munichre.com)

GEO consulting

The service we offer Thanks to its in-depth global experience, our multidisciplinary team can provide clients with first-class support in the introduction and implementation of geoinformation technology (e.g. portfolio geocoding, application of geoinformation systems). Key features: – Access to a pool of expertise on a relatively new area of underwriting – geoinformation – Support for insurers in the planning and implementation of in-house solutions – Access to an international network of experts, service providers, and geodata providers – Support with the setting up of specialised training courses (e.g. marine, aquaculture) – Expertise on issues in the field of airborne data, satellite data, and satellite navigation (GPS, Galileo).

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Appendix
Table 5 Beaufort Scale In Europe, wind speeds are often measured on the Beaufort Scale, invented in 1806 by Sir Francis Beaufort (1774–1857), a rear-admiral in the Royal Navy. It calculates wind speeds according to the effects produced. The scale ranges from 0 (calm) to 12 (hurricane force).
Beaufort Scale Designation Average wind speed at a height of 10 m above ground M/s Km/h 0–0.2 <1 0.3–1.5 1–5 1.6–3.3 6–11 3.4–5.4 5.5–7.9 12–19 20–28 Example of the effects of wind inland

0 Calm 1 Light air 2 Light breeze 3 Gentle breeze 4 Moderate breeze moderate wind 5 Fresh breeze fresh wind 6 Strong breeze 7 Near gale 8 Gale 9 Strong gale 10 Storm 11 Violent storm 12 Hurricane

Smoke rises vertically. Direction of wind shown by smoke drift. Wind felt on face; leaves rustle; ordinary vanes moved by wind. Leaves and small twigs in constant motion; wind extends light flags. Small branches are moved; dust and loose paper raised.

8.0–10.7

29–38

Small trees in leaf begin to sway; crested wavelets form on inland waters. Large branches in motion; umbrellas used with difficulty; whistling heard in telegraph wires. Effort needed to walk against the wind; whole trees in motion. Twigs break off trees; walking against the wind is considerably impeded. Branches break; slight structural damage occurs (slates and chimney pots removed). Trees break; considerable structural damage. Trees uprooted; widespread damage. Devastation.

10.8–13.8

39–49

13.9–17.1 17.2–20.7 20.8–24.4 24.5–28.4 28.5–32.6 From 32.7

50–61 62–74 75–88 89–102 103–117 From 118

Table 6 Hail size chart and typical hailstone damage

Diameter in cm 0.1–0.5 0.5–2.0 2.0–3.0

Comparison Ice pellets, not hail Pea, hazelnut, marble One euro coin

Damage

3.0–4.0

Walnut, table tennis ball

4.0–6.0 6.0–8.0

Golf ball, billiard ball Tennis ball

8.0–11.0

Baseball, grapefruit

> 11.0

Small melon, softball

Virtually no damage, slight damage to plants. Panes in glasshouses, cloches broken; vehicles, fruit and vegetables extensively damaged. Car paintwork damaged, glasshouses destroyed, felt or asbestos roofs pierced, branches broken from trees, birds and poultry killed. Damage to windows and glass roofs; bodywork of cars and aircraft pitted. Damage to roofing tiles. Significant structural damage (façades, metal cladding, window frames), risk of serious injury. Aircraft bodywork badly damaged; humans and animals seriously endangered, paving stones pitted, severe damage to forests. Risk of fatal injury to humans and animals, damage to the fabric of buildings.

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Table 7 Fujita and Torro Tornado Scales
Fujita F0 Torro T0 V in km/h 65–90 Average damage % (light) 0.05 Medium damage % (solid) 0.01 Losses Loose light objects raised from the ground. Twigs snapped. Trail visible through crops. Scaffolding may fall, tents and marquees disturbed. Exposed roof tiles may be dislodged. No damage to building structure. Garden furniture and heavy objects become airborne. Wooden fences flattened. Slight damage to trees. Slight damage to roof tiles and flashings. Minor damage to light constructions, no structural damage. Heavy objects become airborne, can become missiles. Light caravans blown over. Tiled roofs, unsecured flat roofs partially uncovered. Slight to medium damage to light constructions; initial damage to structural elements of solid constructions. Some branches broken, small trees uprooted. Bigger trees uprooted. Cars and caravans blown over. Considerable damage to tiled and unsecured flat roofs. Medium damage to light constructions; damage to structural elements of solid constructions. Moving cars pushed off the road. Trees (free-standing and in forests) snapped. Mobile homes demolished. Severe risk and damage due to airborne objects. House roof timbers completely exposed. Severe damage to light constructions, more damage to structural parts of solid constructions, gable ends torn away. Severe damage to roofs and outbuildings. Severe damage to light constructions; structural elements of solid constructions more severely damaged. Buildings may collapse, particularly agricultural constructions and warehouses. Cars become airborne. Light constructions destroyed to a major extent. Severe damage to structural elements of solid constructions. Buildings collapse. Heavy cars become airborne. Light constructions totally destroyed on wide scale and severe damage to solid constructions. Many buildings collapse. Noticeable debarking of trees by flying debris. Severe damage to solid constructions. Widespread building collapses, contents dispersed over a wide area. Vehicles hurled great distances. Widespread total loss of solid constructions. Trains derailed. Complete debarking of standing tree trunks. Total loss of solid constructions on a massive scale. Total debarking, uprooting of deep roots. Total loss of all solid constructions virtually without exception. Total debarking. Uprooting of deeper roots.

T1

90–119

0.10

0.05

F1

T2

119–151

0.25

0.10

T3

151–184

0.80

0.25

F2

T4

184–220

3.0

0.80

T5

220–256

10.0

3.0

F3

T6

256–295

30.0

10.0

T7

295–335

90.0

30.0

F4

T8

335–378

100

60.0

T9 F5 T10 T11

378–421 421–468 468–515

100 100 100

80.0 90.0 95.0

The international standard for measuring tornadoes is the Fujita Scale, which is based on maximum wind speeds. Since weather stations seldom survive the passage of a tornado, intensity is normally estimated on the basis of the extent of loss. This ranges from minor property damage to total loss. In Europe, both the Torro Scale and the Fujita Scale are used. The Torro Scale has twice as many stages (T0–T11). Different Torro intensities are allocated to the average loss rates for light and solid constructions.

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Authors

Hans-Dieter Absmaier Head of Section, Facultative Business, Divisional Unit: Germany

Thomas Artmann Marine Underwriting and Product-Line Manager, Corporate Underwriting/ Global Clients

Ernst Bedacht Windstorm and Weather Risks Expert, Geo Risks Research, Corporate Underwriting/Global Clients

Werner Dechant Senior Property Underwriter, Austria/Central and Eastern Europe

Dr. Eberhard Faust Senior Climate Risks Expert, Geo Risks Research, Corporate Underwriting/ Global Clients

Stéphanie Gier Underwriter, Enterprise Risks, Special and Financial Risks

Sabine Gosch Underwriter, Corporate Underwriting/ Global Clients

Tobias Grimm Weather and Climate Risks Expert, Geo Risks Research, Corporate Underwriting/ Global Clients

Dr. Marcel Grandi Consultant, Senior Manager – Structuring, Risk Trading Unit

Dr. Joachim Herbold Senior Underwriter, Agricultural Department, Corporate Underwriting/ Global Clients

Prof. Dr. Dr. Peter Höppe Head of Geo Risks Research, Corporate Underwriting/ Global Clients

Benedicta Kramer Underwriter, Agricultural Risks, Corporate Underwriting/ Global Clients

Dr.-Ing. Wolfgang Kron Senior Expert, Natural Catastrophe Extreme Scenarios, Geo Risks Research, Corporate Underwriting/Global Clients

Ernst Rauch Head of Department, Corporate Climate Centre F&E Natural Hazards, Geo Risks Research, Corporate Underwriting/Global Clients

Christian Sitterer Head of Department, Divisional Unit: Germany

Dr. Anselm Smolka Head of Department, Risk Evaluation Natural Perils, Geo Risks Research, Corporate Underwriting/ Global Clients

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© 2008 Münchener Rückversicherungs-Gesellschaft Königinstrasse 107 80802 München Germany Tel.: +49 (89) 38 91-0 Fax: +49 (89) 39 90 56 http://www.munichre.com Responsible for content CUGC 3 and GAPA 1.2 Contact person Ernst Bedacht, CUGC 3.1 Picture credits Cover: NASA p. 1: Munich Re pp. 3 top, 10/11, 14, 26, 31, 44, 49: picture-alliance/dpa pp. 3 bottom, 32/33: BLG LOGISTICS, Bremen p. 12: Marco Kaschuba, Reutlingen p. 20: Reuters/Marko Djurica p. 21/1: Reuters/Petr Josek pp. 21/2, 42: picture-alliance/dpa/dpaweb p. 21/3: AP/Photo/Keystone, Alessandro della Valle p. 21/4: AP Photo p. 22: German Weather Service, Offenbach p. 29: Ralph Orlowski/Getty Images p. 45: H. Lohmeyer/JOKER p. 51: Eric Nguyen/Corbis p. 56: Foto Meinen, Munich Diagrams, maps, tables (unless otherwise specified): © Geo Risks Research Munich Re Printed by Druckerei Fritz Kriechbaumer Wettersteinstrasse 12 82024 Taufkirchen/München Germany

Bibliography – Beniston, M., 2004: The 2003 heat wave in Europe. A shape of things to come? Geophysical Research Letters, 31, L02022. – Christensen, J. H., B. Hewitson, A. Busuioc, A. Chen, X. Gao, I. Held, R. Jones, R. K. Kolli, W.-T. Kwon, R. Laprise, V. Magaña Rueda, L. Mearns, C. G. Menéndez, J. Räisänen, A. Rinke, A. Sarr and P. Whetton, 2007: Regional Climate Projections. In: Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change [Solomon, S., D. Qin, M. Manning, Z. Chen, M. Marquis, K. B. Averyt, M. Tignor and H. L. Miller (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA. – CRU (2003): Global average temperature change 1856–2003. http//www.cru.uea. ac.uk/cru/data/temperature/. – Dotzek, N., 2003: An updated estimate of tornado occurrence in Europe. Atmos. Res. 67–68, 153–161. – Jones, P. D. and A. Moberg (2003). “Hemispheric and large-scale surface air temperature variations: An extensive revision and an update to 2001”. Journal of Climate 16: 206–223.

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