Stormy Times

How Climate Change Affects Property Insurance

In property insurance, we have been observing a change in the claims statistics for quite some time: While the number of losses caused by fire is decreasing due to the constant development of preventive measures, such as stricter building regulations, the picture is quite the opposite for losses caused by natural hazards. In the past few decades there was a significant increase in natural disasters, the effects of which have often been devastating. Last year, particularly extreme storms, floods and forest fires in various regions caused economic damage amounting to a total of 210 billion US dollars. Of this, around 82 billion US dollars were covered by insurance.

NatCat damage increases continuously

In a recent study by the Swiss Re Institute, an average annual growth rate of 1.3% in losses caused by natural hazards has been determined since 1970. In a year with a severe hurricane season and several secondary loss events – called Secondary Perils – the insurance industry could face payments of 250 to 300 billion US dollars in the future. “It is only a matter of time before such a severe scenario becomes real,” said Swiss Re. According to the reinsurer, this development is driven by population growth, increasing asset values in exposed regions and the effects of climate change.

Reinsurers have been researching the origins and effects of natural hazards for decades and have got relevant experience and data; after all, together with their primary insurers, they must be able to assess their exposure as best as possible and manage their risk accordingly in endangered areas. For this purpose, the maximum indemnification for losses caused by natural hazards is usually limited in the insurance policies, which reduces the cumulative risk for the risk carriers.

Risk management and parametric insurance on the rise

In the current hard market phase, which is characterized not only by premium increases but also by a significantly lower availability of capacities, the insurance of natural catastrophes is very challenging. In international insurance programs with many insured locations around the world, different limits and deductibles are often agreed depending on the exposure in the various regions. For the appropriate design of such insurance solutions, the potential exposure of natural hazards at the insured locations must be precisely analyzed in advance and the need for insurance coverage must be determined accordingly. For sites that have already been affected by natural disasters in the past, loss prevention and mitigating measures, such as flood protection systems in flood-prone areas and the existence of emergency plans, are also essential.

As an alternative or in addition to conventional natural hazard coverage in property insurance there are so-called Parametric insurance policies available. In these concepts, defined, measurable parameters, such as a flood level in the vicinity of the insured location, are determined. These parameters are monitored (mostly digital and online) so that the agreed indemnification is paid out when a specified limit is reached. Such insurance solutions can be tailored to the individual needs of the policyholder for natural hazards and weather events and also have the advantage that there is no need to identify and assess any damage that has occurred and payment of the specified indemnification can be made easily and within a few days.

We would be happy to analyze your natural hazards exposure and advise you on the optimal design of your insurance cover.

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Rudolf Schiel

Competence Center Manager Property

T +43 664 822 27 58

To lead the way in the hard market!

Rudolf Schiel, Competence Center Manager Property & Engineering at GrECo, spoke with Klaus Riechmann, Managing Director of the new Ecclesia Re, about the challenges of placing property insurance programmes and the role of the reinsurance market.

Schiel: Ecclesia Re is a young company. How did an own reinsurance broker come to be founded within the Ecclesia Group and what were the motivations behind this?

Riechmann: There were already noticeable capacity bottlenecks in the primary insurance markets in the 2019/2020 renewal, which led to enormous problems in completing some programs. These bottlenecks were caused by local insurers. In order to be better positioned for the future the Ecclesia Group has now established direct access to the reinsurance market by Ecclesia Re which has already borne first fruits in the renewal rounds on October 1st, 2020 and January 1st, 2021. Ecclesia Re was able to find solutions in more than 10 business cases and limit the influence of uncompromising primary insurers.

Schiel: As a reinsurance broker, you procure additional insurance capacity for the primary insurer. Which markets do you usually target and what are the advantages for our clients?

Riechmann: Usually we use continental European capacities, led by the three major German-Swiss companies (Munich Re, Swiss Re, Hannover Rück), and followed by the second league, based in Germany, Switzerland (here especially Zurich), France and Spain. These reinsurers conduct independent underwriting that is not congruent with that of the local primary insurers, and thus represents a useful complement. This expands the range of products available to policyholders.

Schiel: How do you assess the situation in the reinsurance markets in Asia and the USA compared to Europe? To what extent are these markets useful for European policyholders?

Riechmann: Due to the strong regulation by European regulators, which makes capacity from overseas complicated and expensive, overseas markets that are interested in European business have traditionally established themselves in London. However, as a result of Brexit, there are also an increasing number of companies in Zurich under European law. This largely eliminates the need to go overseas.

Schiel: In the industrial property insurance a further hardening of the market is clearly noticeable. Apart from the pandemic, what has led to this change in the market and how do you assess further developments in the next one to two years?

Riechmann: Even without the pandemic, market hardening was in full progress. The pandemic has only reinforced this development. The trend will continue for the time being. This means that alternatives in the reinsurance market remain extremely helpful. What is surprising, however, is that renewal of the treaty reinsurance per the January 1st, 2021 has seen only moderate price adjustments in Europe. Consequently, in contrast to previous market phases, this time the pressure is coming from the primary insurers and not, as in previous market phases, from the reinsurers.

Schiel: Which industries from your point of view will continue to be affected by these developments in the future?

Riechmann: Essentially all types of operations, only the extent of hardening will vary. The known problem industries such as recycling, wood processing, and coal will be hard up against uninsurability. In the D&O as well as in the cyber industries, the massive shortage of capacity will continue. In order to meet the needs of customers here, other concepts will have to be considered ─ also with the help of the reinsurance market.

Schiel: The reinsurers have also recently demanded clarifications or exclusions in the property insurance contracts, such as for “communicable diseases” and cyber risk. Do we have to be prepared for further requirements and coverage restrictions here?

Riechmann: Once again, it is surprising that the reinsurers must demand these clarifications. Surely the primary insurers themselves should have an interest in clarifying things. Now we have the situation that there are many different clauses on the issues. For the broker this means reaching agreement on an appropriate clause before the placement begins and presenting it to the market. Usually, the market just wants to see that the issue is considered.

Schiel: Which strategy you would advise to our clients to adopt in order to be well equipped for future developments in the insurance market?

Riechmann: Basically, I always advise the same strategy: get out of the claims frequency and introduce appropriate deductibles. Check whether deductible models and captive solutions make sense. And finally, pay close attention to your own convincing risk management concept.

Thank you for the interview!

Klaus Riechmann
Managing Director Ecclesia Re
phone: +49 2234 9955 220

After 10 years in the industrial business of Allianz Klaus Riedmann joined the reinsurance broker Jauch und Hübener Rück in 1986. In 1993 he joined Marsh Group reinsurance broker Guy Carpenter as Managing Director of the Munich-based GmbH. In 2005, he took over as managing director of the German branch of the Benfield Group. Following Benfield’s takeover by the AON Group, he moved to König & Reeker, a Cologne-based reinsurance broker, again as Managing Director in 2009. Effective January 1st, 2020 he started to build up the reinsurance broker of the Ecclesia Group.

Ecclesia Reinsurance-Broker GmbH
Ecclesia Reinsurance-Broker GmbH, in short Ecclesia Re, is a new company in the Ecclesia Group and was founded in March 2020 with it headquarter in Cologne. Increasing customer value for (primary) policyholders and strengthening the competitiveness of the Ecclesia Group is the mission of Ecclesia Reinsurance-Broker GmbH. It acts group wide as a know-how unit for all questions concerning reinsurance. The Ecclesia Group has been a cooperation partner and strategic shareholder of GrECo International Holding AG since 2005.

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Rudolf Schiel

Competence Center Manager Property

T +43 664 822 27 58

Well protected against weather extremes

Well protected against weather extremes

The GrECo Risk Engineering GmbH offers individual analyses for protection concepts against floods & Co. A targeted risk management can protect your business facilities or the appropriate crop insurance can minimize the risk of harvest loss as well as seed and fruit damage.

If you think back to the beginning of the Corona crisis and the time in the home office, you will especially remember the beautiful April with early summer temperatures that made the lockdown and exit restrictions a challenge.

The ZAMG (Central Institute for Meteorology and Geodynamics) speaks of the fourth warmest April since the beginning of measuring history (i.e. since the 18th century) and of one of the driest springs ever. There were almost 20% more hours of sunshine than on average (+ 55% in April) and temperatures were almost 1 °C above average (+ 2.1 °C in April). In the months of March and April there was 45% less precipitation than the long-term average (1981-2010), in Eastern Austria even 71% less. The rain in May could not compensate the extreme dryness of the previous months. Overall, this year there was about 30% less rainfall.

Due to the mild beginning of the year, many plants sprouted up to three weeks earlier. The rain-prone month of May could just about prevent a catastrophic crop failure. Nevertheless, the missing harvests resulted in a lack of grass cuttings, which are urgently needed as fodder for the animal supply. Conclusion: In addition to the corona crisis, the situation for agricultural enterprises has worsened immensely.

The number of extreme events is increasing worldwide

An ongoing project of ZAMG showed that since 2000 a significant increase of weather conditions with bad weather potential of 30% – 50% is visible. This is, among other things, a direct consequence of the increase in the water vapor content of the air caused by the rise in temperature. Due to the increasing warming, the thunderstorm season in Austria is extending towards spring and autumn.

Evidence of the increase in such weather extremes was already evident in June. The long heavy rainfall in Lower Austria led to flooded fields, debris flows, local flash floods, roadblocks, flooded cellars and demanded about 100 storm-operations by the local fire departments. In July, the series of storms continued in the western provinces of Austria such as Salzburg and Tyrol.

The trend towards such extreme events is also evident worldwide. Severe thunderstorms with heavy rainfall swept over areas of the USA, while at the same time heat waves were announced in other parts of the country, such as California. China was hit by a catastrophic flood at the end of June, triggered by the heaviest rainfall in 70 years. The rising number of forest fires, as e.g. in Australia and the USA, is also attributed to the consequences of the weather extremes.

Preventive protection concepts against floods & Co.

Unlike weather phenomena such as drought and aridity, hydrological hazards such as floods, debris flows and surface runoff are much more predictable and can be dealt with at a local level. In general, especially in Central Europe, superregional flood protection is taken over by the state. However, if the properties of companies are located in areas that were not designated as flood areas at the time of construction, it is necessary to take your own preventive protection measures.

The GrECo Risk Engineering GmbH (GREG) offers consulting services such as risk identification and analysis, evaluation and risk assessment of threat potentials from natural disasters as well as preventive action planning. In this way, technically efficient and economically feasible solutions are developed together with the companies in order to be prepared in case of floods, for example, and to prevent potential damage and shutdown of operations.
The risk consultants of our GREG team rely on internationally proven protection measures and the state of the art in natural hazard management and flood protection in particular.

Tailor-made insurance solutions covering property damage and business interruption due to natural events round off an effective protection concept.

Crop insurance as a protective shield for farmers

Due to climate change, farmers also face new challenges in their risk management. Beside sustainable farming methods, dry periods and drought can often only be countered with artificial irrigation. Since such a measure is tied to a multitude of factors (infrastructural conditions, available water resources, soil conditions, etc.) and generally requires very high investment costs, GREG offers individual analyses, which at the same time provide a basis for appropriate insurance protection.

A risk-adequate crop insurance contributes to keeping the economic risk of losses and damage low by providing appropriate coverage.

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Günther Kundela

GrECo Risk Engineering

Tel.: +43 5 0404 354

Climate change & Co

How technological development and big data can improve the resilience of companies to natural disasters. Parametric insurance is establishing itself as an alternative to covering natural catastrophe. Swiss Re reports!

The demand for parametric insurance policies is growing, last but not least because their benefits go beyond weather-related events. From the Internet of Things, automation and sensors, to artificial intelligence and big data to smart data, the business world is technologically more advanced than ever before.
Existing systems and supply chains are digitised, production facilities are becoming automated, and factories and microchip sensors are starting to predict maintenance requirements and potential breakdowns before they occur.

All this technology generates a lot of data – big data – that can offer great insights into the next major risk event. And insurers are making this data the focus of their innovative risk solutions so that their clients can be more resistant to diverse risks such as climate, weather and natural disasters.

Wind risk as an example

Let us take a practical example. An energy supply company in Europe classifies winter storms as a major risk to its power lines. Strong winds may not only cause direct damage to the distribution network, but also uproot whole trees or break off branches which then fall onto the (power) lines.

The client was searching for efficient protection for its nationwide low-voltage distribution network. The risks for power lines were practically not insurable with traditional insurance solutions. The client was also keen to avoid any uncertainties with claims processing (due to it being difficult to estimate the costs for the reconstruction and upgrading of the network) and to ensure that quick payment was made in the event of a claim.

The parametric insurance solution enabled the client’s wind risk to be covered. An index was developed in close cooperation with the client, which describes the damage as a function of the measured peak wind speeds. As the wind data is calculated independently and is available quickly, the client can expect the claim to be dealt with fast and simply in the event of an incident.

As there are sometimes large sums of money at stake, many industries are actively looking for more innovative risk transfer options to protect themselves against the increasing threat caused by weather-related damage.

Technology and data are a considerable part of the solution here. Weather stations and measuring instruments provide clear and independent information on wind conditions. Along with the historic data from these measuring stations, the information is structured as a customised payment formula in order to depict the underlying risk in the best possible way.

The data from the measuring stations is aligned with predefined triggers determined in cooperation with the client in order to define the time and amount of the payment.

The advantages

There are three main advantages to parametric insurance.

  1. Parametric insurance policies are a simplified and more transparent version of traditional insurance policies, as fixed payments are made if the measured data (e.g. wind speeds, water levels, soil accelerations) reach or exceed critical threshold values. Parametric insurance policies are therefore geared towards the incident and not the actual loss.
  2. Another advantage is the quick payment of claims. It often takes months or even years with a traditional insurance policy until claims resulting from business interruptions (BI) are settled, as the loss must be analysed and confirmed before a payout is agreed. A parametric insurance policy reduces the steps to payment of the claim. On-site visits no longer have to be made and forensic examinations and claims settlements no longer have to be completed before a claim is paid. If the insurance trigger is activated, the payment will be made in a few days without delay.
  3. The certainty of compensation is also advantageous. There are often uncertainties with traditional insurance policies: you sometimes only know how high the insurance cover is once a loss situation has been examined. There may also be disputes about the amounts. Parametric insurance policies put an end to these uncertainties, as all payments are agreed in advance and are therefore fixed. The payments can be used to cover all direct and indirect costs incurred as a result of the insured event.

Parametric natural disaster cover may also make sense in addition to or for the restructuring of property programmes, as these risks to individual exposed locations can be systematically “outsourced” and covered. High limits for individual locations and rapid compensation in the event of a loss that guarantee liquidity, can offer great added value in sectors such as Construction, Energy, Automotive, Transport & Logistics, among others.

Outlook: extending triggers

Despite the fact that the solution is typically applied to weather-related events (to improve resistance to climate risks), we are starting to discuss how we can also apply the principle of parametric insurance to other risks.

AI, IoT, sensors, automation. All these components generate so much data on all risks in all industries, from machine failures to business interruptions without physical damage, that it is only a question of time before an agreement is reached on triggers from sensor data for risks which go beyond weather events and natural disasters.

As long as we can ensure that data is collected objectively, independently and reliably, we can develop parametric insurance policies for many complex risk situations.
The future for parametric insurance policies is indeed bright and is continuously expanding with new data that can be collected and analysed systematically.

Tanja Dippel
Customer & Distribution
Manager Austria,
Swiss Re Corporate Solutions
T +49 89 38441024

Jan Bachmann
Head Innovative Risk Solutions
T +41 43 285 21 42

Martin Hotz
Head Parametric NatCat
T+41 43 285 68 57
Swiss Re Group

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Rudolf Schiel

Competence Center Manager Property

T +43 664 822 27 58

Blackout all over Europe, and then?

A pan-European power and infrastructure failure, a so-called blackout, would bring our society to the brink of collapse within a few days.

Neither the people nor the companies or the state are prepared for these kinds of wide-spread utility failures. We are living in a dangerous state of false security. But how realistic is this scenario and what would be its consequences?

The European power grid is one of the most reliable in the world. From a risk calculation perspective, the likelihood of a complete failure is very low, as this sort of event has never happened in Europe. However, the challenges to secure grid operation and the risk of major disruptions or failures have been increasing for many years. There are many reasons for this. They range from a power market that knows no physical limits, to an energy revolution that ignores systemic interrelationships and only calls for the replacement of individual elements, to new vulnerabilities arising from increased connectivity.

First phase of the blackout

A disruption can spread across large parts of Europe within seconds. It could take a week before the entire European grid system is working reasonably again. However, that is just the first phase of a blackout that grid operators have been anticipating for years. Emergency power generators are often used in other areas as a security measure. However, they can only cover a fraction of actual requirements. Performance is usually highly overestimated and susceptibility highly underestimated in this situation.

Second phase of the blackout

The second phase of the blackout until telecommunications services (fixed and mobile networks, internet) are working reasonably again is also completely underestimated. A recovery period of at least a few days should be anticipated due to expected hardware damage and overloads. The duration of the power failure is decisive here.
The longer the power failure lasts, the more difficult and time-consuming it is to reboot these systems. This means that neither the production nor the distribution logistics or sale of goods are possible. Fuel logistics would not function either. There are simply too many – and often ignored – dependencies in supply logistics and many of these are transnational. Just two examples of many:

  1. in a local power failure, a key network component loses its configuration and the entire IT network and telephone system no longer work;
  2. a necessary online connection to the cash register drops out at a petrol station being supplied with back-up power and prevents fuel from being distributed.

Third phase with time-consuming restarts

A chain is only as strong as its weakest link. Supply bottlenecks lasting several months are to be expected as a result of serious damage and total failures in food production, food processing and food distribution. This means that time-consuming restarts are also to be expected in phase three.

As an Austrian security research study has shown, around one-third of the population thinks it will be self-reliant for a maximum of four days. For an additional one-third, the figure is seven days. However, it will only be possible to restart on a broader scale in the second week at the earliest.

Generally speaking, employees and members of the emergency services or companies are not much better prepared and organised than the rest of society. However, if people are in crisis at home and are starving, they will not come to work to reboot the systems or to maintain an emergency supply. This is the start of a vicious circle.

Help the people to help themselves

Helping the people to help themselves is the main basis for all other necessary measures. Only when as many people as possible are able to keep their heads above water for at least two weeks will a rapid and extensive restart be possible.
However, there is a lack of awareness of this because there is hardly any risk and safety communication, usually out of misconceived consideration. “We don’t want to unsettle people,” is a recurring statement.But it is precisely this appeasement that provides for early escalation and uncontrollability.
A population that is self-sufficient is essential for any type of interruptions in supply and a prerequisite for a resilient society. In order to ensure that more and more people take precautions, it is essential to issue safety communications and information openly and honestly. It remains to be seen whether the coronavirus crisis will cause a change in mindset in the long term.

Herbert Saurugg, MSc
Präsident der Österreichischen
Gesellschaft für Krisenvorsorge
T +43 660 3633896

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Rudolf Schiel

Competence Center Manager Property

T +43 664 822 27 58

High risk, excellent fire protection

Competitive insurance market for timber industry and recycling companies

The premiums in corporate property insurance are currently rising in all industries and loss-affected insurance contracts and types of establishments that are classified as critical, such as the timber industry and recycling companies, are especially hard hit by the consequences.

The triggers for market hardening were primarily the negative results of international corporate insurers and the lower number of providers as a result of company mergers. In addition to the premium increases, the different, more cautious risk and underwriting policy is also particularly evident among insurers with less capacity available for “risky” industrial risks (compared to the “normal” core business) on the market.

Few providers

A particular challenge at present is posed by the placement of insurance solutions for timber processing businesses and recycling companies: there are currently very few providers that accept requests for these industries. The majority of market players refuse to submit an offer from the start because claims experience does not suggest a positive business development. The remaining insurers now focus mainly on compliance with safety standards, preventative and precautionary fire protection, and the general attitude towards risk management in companies. They are checking in detail the extent to which their minimum requirements have been met and are also requesting additional detailed information on the current risk situation.

Risk mitigation measures

The insurability of their member companies has been a hot topic for the professional associations of the aforementioned industries for years, which is why the decision has been taken proactively to help improve the claims situation. The professional association of the Austrian timber industry and recently the association of Austrian waste disposal businesses, for example, has published its own guidelines for fire protection. These were produced in conjunction with fire protection experts and the insurance association. This means that specific recommendations for improving risk quality are provided, along with an overview of the fire protection measures requested by many insurers.

The extent to which existing fire protection equipment meets the recommendations of these guidelines can be checked using GrECo’s self-assessment tool. A corresponding report is generated after all relevant data has been entered, and clearly depicts the current risk situation. From the report, our risk engineers can then develop a tailored set of risk improvement measures.

GrECo Risk Engineering GmbH is pleased to offer advice here and is also available for individual analyses of the existing risk situation and to specify risk-improving measures.

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Rudolf Schiel

Competence Center Manager Property

T +43 664 822 27 58

Blackout – when it suddenly gets dark

While we’re all still dealing with the effects of the COVID-19 crisis, the next shutdown could be just around the corner. Experts predict that a so-called blackout will occur within the next five years. This is a large-scale failure of the power supply that would result in the collapse of the entire infrastructure and furthermore cause catastrophic restrictions in our everyday life. Because without electricity everything stands still: telecommunications, water and fuel supply, traffic control, heating and air conditioning, computer systems and much more are not available for an indefinite period of time, which can result in significant business interruptions for all industries and production companies.

The triggers are manifold…

There could be many reasons for a blackout: cyber and terrorist attacks, natural disasters, human error and, above all, insufficient network stability. The power supply is based on systems that are prone to errors due to their complexity, which triggers chain reactions that can lead to nationwide service interruptions. It is not possible to permanently eliminate all these potential causes, so the threat of a future blackout is severe.

In March 2015, for example, 80 out of 81 provinces in Turkey suffered a 10-hour power outage. Public transport stopped, traffic lights failed and the result was a fundamental traffic chaos. The total economic damage amounted to several hundred million EUR. Initially, a cyber-attack was suspected as the trigger, but in the end the variations in the Turkish power grid were identified as the cause of the blackout.

Similar incidents have occurred on all continents several times in the past decades, but what is striking is the increasing number of power outages in recent years, which is probably due to the increasingly complex networking of the power infrastructure and the growing proportion of alternative power generation with wind mills or solar energy.

…the solutions in risk and insurance management as well!

Whether and to what extent property and business interruption policies provide insurance protection for the consequences of such events can only be assessed for the individual cases and depends on the respective circumstances and the underlying insurance conditions. In the common extension clauses for business interruption damage due to service interruption, however, the occurrence of physical property damage (e.g. a fire at the suppliers premises) is a precondition.

We therefore recommend to our clients to analyze the potential effects of a blackout together with our experts in the course of a mutual risk dialog and to adapt the necessary insurance cover to the respective demand as best as possible.

Of course, well-functioning risk management also plays a decisive role in dealing with service interruptions due to longer-lasting power failures. Blackout scenarios should therefore also be taken into account in the emergency and business continuity management plans and appropriate preventive measures should be established so that consequential damage, such as the failure of critical cooling systems, will not occur and potential business interruption loss is limited as far as possible. Our risk engineers from GrECo Risk Engineering GmbH are also happy to provide further information and advice on risk and business continuity management in case of a blackout.

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