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Munich Re is one of the world’s largest reinsurers with revenue of EUR 50bn and total assets of EUR 277bn (2015 Annual Report). Reinsurers essentially act as insurers for insurance companies that insure businesses and individuals. If insurance industry sounds boring, then reinsurance is like boring squared, so why even discuss it? Well… what if I told you that Munich re has been one of the earlies believers in anthropogenic climate change and warned the world about its consequences as early as in 1973? Interested? Be my guest.
First, why would insurers care at all about climate change? Let’s examine the graph below (Swiss Re research) – seems like recently cost of insured weather catastrophes has been soaring. Just as a reminder, insurance companies make money on not spending their earned premiums on payouts against insured events, which directly hit their pockets.
Really? As Warren Buffet, whose Berkshire Hathaway derives a significant portion of its profits from insurance business, puts it in his letter to shareholders, as insurance costs increase, they are matched by rising premiums so “the likely … effect on Berkshire’s insurance business would be to make it larger and more profitable”. However, as more countries acknowledge negative impact of climate change and pledge their support (incl. 154 US corporations at the November 2015 conference in Paris), introduction of new energy and sustainability initiatives could result in decreasing premiums for some companies. Furthermore, changes in climate make it increasingly difficult to measure risk. As Andreas Schraft, managing director for catastrophic perils at Swiss Re (another major reinsurer) puts it, “What we are concerned about is that if risks become too big, they may become unmeasurable”. In addition, in its report “Climate Change-Related Legal and Regulatory Threats Should Spur Financial Service Providers to Action” Standard & Poor’s suggests that the reputational, regulatory, fiscal and legal risks on the short-to-medium term time horizon may be greater threats to insurers than direct costs of covering catastrophes.
Alright, since it considers climate change such a threat, let’s see what Munich Re have done to address these fears:
- In 1974 the company launched Geo Risk Research Department to study the topic of climate change. Munich Re created an enormous database of climate data, shared with the public and scientific community.
- Sponsored research initiatives, such as “Evaluating the Economics of Climate Risks and Opportunities in the Insurance Sector”, five-year research project tracking the impact of climate change on the insurance sector, run by London School of Economics (my undergrad university).
- Introduced innovative products, such as micro-insurance for small farmers from developing countries, who would otherwise not be able to afford traditional insurance, and whose lives are adversely affected by climate change of developed countries’ origin.
- Has been very active in covering renewable energy businesses through ERGO’s, its primary insurer’s tailored products and HSB subsidiary, leading specialist provider of insurance for renewable technologies.
- Launched initiatives, such as Munich Climate Insurance Initiative, aimed at developing new insurance solutions to protect people from emerging countries against growing losses caused by climate change-related events.
- Has led “Caribbean Catastrophe Risk Insurance Facility” (CCRIF), set up to offer 16 countries in the Caribbean insurance cover against hurricanes and earthquakes.