New Models

Seeking Clues in Harvey's Wake

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Insurers avoid hit on Texas floods, which are covered by US government. Picture source: Reuters

Frankfurt is half a world away from the havoc being created by Hurricane Harvey in Texas, but these Germans are following the televised images of toppled houses, damaged petroleum refineries and devastating floods with rapt attention.

In the Corporate Climate Center at insurance giant Munich Re, the center’s director, Ernst Rauch has to weigh the potential impact of the storm on his firm’s balance sheet. Munich Re is the one of the world’s largest reinsurance firms, which means they sell insurance to insurance companies as part of a risk mitigation strategy. If disaster strikes, the reinsurance firm pays part of the claims against the insurance company.

Despite the terrible television images, Mr. Rauch makes a relatively upbeat appraisal of the damage: far less than the $60 billion (€50 billion)  of damage caused to New Orleans by Hurricane Katrina in 2005. J.P. Morgan reckons the costs will be under $20 billion.

“It’s difficult to assess the actual losses because insurance companies in the US don’t cover flood damage”

Ernst Rauch, Director of Munich Re's Corporate Climate Center

“So far, Harvey doesn’t look as bad as Katrina,” Mr. Rauch said in an interview with Handelsblatt. “The financial losses are mainly due to flooding in the Houston metropolitan area. It’s difficult to assess the actual losses because insurance companies in the US don’t cover flood damage to private homes.” That is offered by a government form of insurance called the National Flood Insurance Program, but only about 40 percent of homeowners take the coverage.

Mr. Rauch pointed out that insurance companies changed the way they offered insurance in the U.S. states along the Gulf of Mexico after Hurricane Andrew in 1992 caused $17 billion in damage, forcing several private insurers into bankruptcy.

Insurers at that time of Andrew had relied on historical claim information to formulate their future premium charges. After Andrew, which Mr. Rauch called “a wakeup call,” insurers developed computer models to forecast probabilities far into the future.

“Katrina had the worst damage from a natural event that insurers have ever encountered,” Mr. Rauch said, “but thanks to these new models, the industry was able to deal with the financial consequences of Katrina much better than they did with Andrew.”

He added that the insurance industry has a much stronger capital base and could deal with a storm even bigger than Katrina without incurring significant financial difficulties.

Asked whether climate change was responsible for an increase in severe flooding or damage from storms, Mr. Rauch demurred. “What we have seen is that thunderstorms have increased in frequency in some parts of the world in recent decades, including southern Germany,” he said. There is a similar picture in the US, but the storms are not evenly distributed across the country. You can’t interpret the data to say that climate change is happening everywhere.”

Mr. Rauch also said that Houston could have taken more protective measures such as better infrastructure after Tropical Storm Allison in 2001 caused huge damage in Houston. Allison was a relatively weak storm but had a huge rainfall. “If you look at the pictures of damage from 2001, they look very similar to the images we are seeing from today in Houston,” he said.

Comparing the US to Western Europe, Mr. Rauch said that storms in the US tend to be much more intense than European storms. But European weather often affects a much larger region than storms in the US.

Carsten Herz covers insurance and asset management for Handelsblatt out of Frankfurt. New York editor Charles Wallace adapted the story for Handelsblatt Gobal. To contact the author: herz@handelsblatt.com.

 

 

 

 

 

 

 

 

 

 

 

 

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