August 3rd, 2017

Public Sector Risk Financing Perspectives in Europe/Middle East/Africa: Part II: Public Sector Strategic Initiatives in EMEA

Posted at 1:00 AM ET

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Charles Whitmore, Managing Director

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Organizations throughout EMEA have significantly increased the establishment of strategic initiatives to close the protection gap and improve society’s ability to recover from the devastating impact of natural catastrophe losses. Marsh & McLennan Companies’ Risk & Insurance Services Segment, comprised of Guy Carpenter and Marsh, have developed resources and expertise to help clients in this area.


Smart Analytics to Enable the Quantification of Risk

As economic and insured losses from natural catastrophes such as floods and hurricanes have increased dramatically, there has been heightened demand for improved measurability and modeling of risk that allows carriers to better underwrite and manage exposures and to create a more reliable view of previously uninsured risk. Analytics that measure risks that are perceived to be “uninsurable” can help unlock private sector insurance industry participation.

In Europe, population growth is more modest than in other parts of the world, increasing from 580 million to 740 million, or 27 percent since 1957. In comparison, the total world population increased from 2.8 billion to 7.4 billion, or 161 percent during the same period. While it has grown at slower rates than the rest of the world, Europe has similarly experienced a steady increase in urbanization leading to increased concentration of insured risk.

Rising global temperatures are projected to impact the mid-latitude and Polar Regions more than the tropics. This is expected to produce two outcomes. First, the temperature gradient between the poles and the equator will drop, potentially reducing storm formation. Second, the higher overall temperature will increase evaporation and the amount of water vapor in the atmosphere, potentially leading to more intense storms. The impact of these two changes leads to a projection of increased frequency of both extreme rainfall events and extended dry periods in Europe.

As a result of these and other factors, the Intergovernmental Panel on Climate Change (IPCC) has identified three main areas of risk for Europe:

  1. rising sea levels, coastal erosion and peak river discharges, combined with advancing urbanization, will lead to greater economic losses as a direct result of flooding;
  2. reduction in water availability due to increased abstraction from river and groundwater and increased evaporative load will result in greater risk of drought conditions, especially in southern Europe; and
  3. more frequent occurrence of extreme heat events will impact human health, crops and the generation of wildfires.

The biggest modeling challenge for Europe is for flood. Europe is unusual in that it has countries with small geographies and comparatively large rivers. Single flood events can hit more than one country and create correlation issues for insurers and reinsurers. The most notable example of this is the Danube River, which touches ten countries as it makes its way from Germany to the Black Sea.

Flood poses particular challenges for modeling: the hydraulic modeling of flood extents requires a high quality digital terrain model processed specifically for the task by removing features like bridges. The computational demand for hydraulic modeling is very high, especially as the size of the area to be modeled expands, and flood is also one of the few perils that humans can directly influence through the construction of defense structures. Unfortunately, detailed data on the presence, construction standard and operational regimes of defenses is not universally available, consequently considerable effort is needed by modelers to quantify this aspect. Finally, as flood damage occurs in a fairly binary manner - either you are in the water or not - highly accurate information on the location of the risks to be modeled, which is often lacking, is essential, especially in developing regions.

Despite these challenges, the first models for flood in Europe began appearing in 2004. While commercial vendors have been slow to address the gap so far, others, including brokers, have been steadily producing models. At Guy Carpenter, we have produced a range of flood models for key countries and a pan-European hailstorm model based on detailed claims data. This represents an integral part of our effort to provide a means of quantification of risk in order to enable insurance carriers to price and assume risks that were previously uninsured - and, when impacted by catastrophe losses, ultimately burdened public sector balance sheets.

Link to Part I>>

Link to Part III>>

Link to Part IV>>

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