Expect the unexpected

Australia and New Zealand Expect the Scientific facts and economic impacts of natural disasters impacts economic Scientific and facts unexpected

Scientific facts and economic impacts of natural disasters

Munich Re Are you prepared?

Intense Convective storms/ precipitation Hailstorms

Cyclones Storm surges/ Floods

Earthquakes East Coast Lows

Bushfires Volcanoes Blindtext

The magnitude and frequency of hazards are rising while metropolitan areas and their value concentrations are also growing. Will your business withstand the ever-increasing perils?

Rely on the financial strength of Munich Re and our exper- tise as a strong partner to safely withstand large nat cat events – even the unexpected ones.

Munich Re Expect the unexpected 1 Contents

3 Foreword “We are committed to the Australian and New Zealand markets”

4 Facts and figures

6 Earthquakes Expect a Big One

11 Resilience Together for a resilient Australia

12 Climate Australia and New Climate change on the rocks – did you know …

Zealand have been 14 Cyclones hit hard by natural Turbulence on the Gold Coast 20 Risk catastrophes in recent What is risk? years: floods, cyclones, 24 Climate hailstorms, bushfires Natural climate variability 28 Floods and earthquakes. The Never underestimate troubled water consequences of these 32 NATHAN severe nat cat events Check into NATHAN Risk Suite 34 Hailstorms are among the worst in Icy cricket balls from above the world, and the risks 38 Risk modelling associated with them Dreaming of the perfect model 40 Bushfires are changing fast. Australia on fire

44 Volcanoes Sleeping giants underneath

48 Economy How much can Australia’s economy withstand?

51 Contacts

2 Munich Re Expect the unexpected Foreword

Mr. Hawkins, Mr. Eder, how would “We are committed you sum up the natural catastrophe situation in Australia and New Zea- to the Australian land at present?

and New Zealand Scott Hawkins: Over the past ten years, we have observed an increased markets” frequency of medium and large nat­ ural catastrophe events. This has impacted many regions of Australia and New Zealand and has included various perils: earthquakes, cyclones, Heinrich Eder, floods, bushfires and hailstorms.

Managing Director, and Heinrich Eder: As much as these per- Scott Hawkins, General ils – unfortunately – seem to be part of life, events in recent years have Manager Non-Life, of demonstrated that insurers need to Heinrich Eder Munich Re in Australasia, focus more on the “unexpected”. All we know is that perils might now hit comment on the current us more often, harder or in unex- Hawkins: Of course, we also demon- situation, trends and pected places. Insurers need to be strate our strong commitment in financially prepared for such unfore- terms of the capacity that we deploy developments on the seen large natural disasters. With in the market. Our local presence (re)insurance markets this publication, we want to highlight and empowerment enable us to bring such scenarios and help our clients the Munich Re (Group) balance sheet in Australia and New through financially stormy days and to our clients in the region. Zealand. rough waters to come. What does Munich Re contribute to What developments do you see? higher resilience?

Hawkins: El Niño and La Niña peri- Eder: When it comes to local engage- ods will pose many challenges in the ment, we certainly walk the talk. We natural catastrophe environment. We are highly driven to helping boost may witness more powerful cyclones, resilience to natural catastrophe increased drought and more bush- events. As a founding member of the fires. But regardless of climate vari­ Australian Business Roundtable, we ability, constant vigilance is required actively support the development of when assessing your exposure, in a more sustainable, coordinated order to be more resilient to large national approach to making our natural catastrophes. communities stronger and Austra­lians safer – so that we are able to over- How does Munich Re help clients come the expected and even the and the public to be more resilient to unexpected. natural disasters? [email protected] Eder: We are very committed to the https://au.linkedin.com/in/ Australian and New Zealand mar- heinricheder/de kets. We have operated here for the last sixty years, offer valuable local [email protected] and global experience and financial https://au.linkedin.com/in/ strength, and have built up unique scotthawkins1 Scott Hawkins expertise on all kinds of nat­ural haz- ards. But there is more to it than that: we are always in close ­contact with our clients, pay claims swiftly and offer reliable support in difficult times. We stand behind our ­clients all the way, and this is something they can always expect from us.

Munich Re Expect the unexpected 3 Facts and figures

2015

A$ 6.3bn

Natural disasters currently cost the Australian economy A$ 6.3bn per year. // Facts and This amount is expected to increase to about A$ 23bn in 2050. figures Source: Australian Business Roundtable

2050

A$ 23bn

80% of the insured people affected by the Black Saturday Victorian Fires in 2009 were underinsured.

The Sydney hailstorm of 1999 produced hailstones the Exclusive online content 7 cm size of cricket More facts from our balls. Munich Re NatCatSERVICE: www.munichre.com/ausnz/ natcatservice

4 Munich Re Expect the unexpected Facts and figures

Losses (CPI-adjusted in A$ m) Losses (CPI-adjusted in A$ m)

The 5 most significant loss events The 5 most significant loss events in Australia 1980–2015 in New Zealand 1980–2015

3,800 Overall losses 28,000 Overall losses 2,800 Insured losses 19,500 Insured losses Hailstorm Earthquake 14.4.1999 22.2.2011 New South Wales South Island

3,500 13,000 2,000 10,200 Floods, flash floods Earthquake 10−14.1.2011 4.9.2010 Queensland Canterbury

3,100 3,200 1,800 2,400 Earthquake Earthquake 28.12.1989 13.6.2011 New South Wales South Island

3,000 1,000 1,600 910 Cyclone Yasi Earthquake 2−7.2.2011 2.3.1987 Queensland North Island

1,900 335 1,400 240 Floods Flood 11−18.2.2008 27−29.1.1984 Queensland Invercargill

Source: Munich Re NatCatSERVICE

Raising the Warragamba Dam wall by 23 metres would reduce annualised average flood costs by around three quarters.

Source: Australian Business Roundtable

Munich Re Expect the unexpected 5 Earthquakes Expect a Big One

Alexander Allmann Munich Re expert on earthquakes

6 Munich Re Expect the unexpected Earthquakes

Earthquakes in Australia is not known as an Our models show that regions of ele- ­earthquake hotspot – but neither vated seismicity are in close proxim- Australia are infrequent was Christchurch in New Zealand. ity to most of the major conurbations and mostly moderate in As it turned out, in Christchurch in (Perth, Adelaide, Melbourne and 2010/2011 an unexpected series of Sydney). For each individual area, the size. At first glance, this severe earthquakes with a magni- seismicity is too low for a robust appears to be a much tude of up to 7.1 surprised even the ­statistical analysis of the probability experts and destroyed large parts of a severe event right underneath a more comfortable of the city – it was one of the most city or the maximum size of such an situation than in New expensive insured natural catas­ event. What we do know is that each trophes in history. Since Australia is of the cities has the potential to be Zealand, Japan or the not located at the margins of tectonic hit by earthquakes bigger than a United States. However, plates, where 90% of the world’s magnitude of 6. Earthquakes like seismicity occurs, many Australians those in Christchurch should not on closer examination are not aware that this is a peril we come as a surprise and are very real- the picture looks need to worry about – but maybe we istic scenarios. should. different: earthquakes Many buildings will not survive in Australia could cause The Australian continent experiences strong ground motions small earthquakes all the time insured losses in the because the Indo-Australian tectonic A few small to moderate earthquake same order of plate is being pushed north and thus events have provided data that have collides with other plates. This leads helped us to constrain our modelling magnitude as in the to a build-up of mainly compressive of the potential ground motions that highest-exposed stresses that are released in shallow can be expected in Australia. Overall, earthquakes. Although earthquakes the data set is still very limited and regions worldwide. can occur anywhere in Australia, this there are barely any data for bigger seismicity is spatially heterogeneous; events. The uncertainty associated some regions have significantly with these ground motion estimates increased seismic activity. Statistical is high. Fortunately, the soil conditions analyses on recorded earthquakes in cities like Sydney are much better show that events with a magnitude than in Christchurch. Although ground similar to or higher than that in New- motion amplification is expected in castle in 1989 (magnitude 5.6) can some regions that have soft soils, no be expected every two years, with a widespread liquefaction is expected. magnitude of 6.0 or more every five years on average. Fortunately, most Given the moderate earthquake haz- of them happen in unpopulated or ard in Australia, buildings are not sparsely populated regions. constructed to resist very strong ground motions. The moderate New- castle event in 1989 provided a good #Earthquakes in Aus- illustration of the very poor behaviour tralia? It could happen of structures such as unreinforced close to every major city: masonry buildings. Should a severe low probability, high earthquake occur underneath one of consequences #seismic the major cities, the ground motions activity, #lessons will significantly exceed the design learned, #Christchurch ground motion in the building codes. This will inevitably lead to very high loss levels close to the earthquake epicentre. In Christchurch, the design ground motion was exceeded by more than a factor of three. The Central Business District (CBD) had to be cordoned off for years, and many buildings suffered a total loss.

Munich Re Expect the unexpected 7 Earthquakes

Exposures will be factors higher The experience from Christchurch than in Christchurch demonstrates that claims handling Historic earthquakes and reconstruction would be a com- in Australia What if the unexpected were to hap- plex and long-lasting process. Such pen? It will happen. We know an unexpected complexities arise after earthquake will hit one of the cities. nearly every major natural catas­ The only questions that remain are: trophe event worldwide. Many when and how severe? So far, we of the challenges following the 5.4 have not experienced a major earth- Christchurch events were associated Magnitude quake catastrophe in Australia. This with the structure of the market – the 2012 is consistent with our expectation of Earthquake Commission (EQC) in Victoria – Moe a low to moderate seismicity. For particular. In addition, legal aspects return periods of several hundred slowed down claims handling. years, this is different. Loss esti- 5.3 mates are very high, with consider­ Prepared for a Big One with Magnitude able uncertainties. They increase Munich Re 2011 sharply for higher return periods. Queensland – Bowen This makes risk management diffi- Australia’s largest earthquake, with a cult for the insurance industry. magnitude of 7.2, occurred in 1941 in Western Australia – far away from 5.6 In Japan, insurance cover is strictly any of the bigger cities. The earth- Magnitude limited and extreme events are quakes in Christchurch have shown us 1989 expected, so that potential losses that even moderate earthquakes can New South Wales – are not likely to be significantly under- cause huge losses for the insurance Newcastle estimated. In Australia, a really industry. Such an earthquake – but unpleasant wake-up call from an with significantly higher losses – is a extreme event is much more likely. very realistic scenario for Australia. 6.3–6.7 Magnitude This is because earthquake insur- 1988 ance penetration in Australia is gen- The vulnerable, highly concentrated Northern Territory – erally very high (above 80%), and building stock has the potential for Tennant Creek risks are covered on a full-value basis extreme losses. A repetition of the with very small deductibles. Most of 1954 Adelaide earthquake (magni- the exposure in Australia is concen- tude 5.7) would result today in 6.2 trated in the big cities. The value multi-billion insured losses. A bigger Magnitude concentration is enormous. If an event closer to Adelaide could cause 1979 earthquake strikes one of the cities, a loss costing tens of billions. Western Australia – the exposure affected by high ground Cadoux motions will be factors higher than in [email protected] Christchurch – and the major part of https://de.linkedin.com/in/ any earthquake loss will be borne by alexanderallmann 6.9 Magnitude the insurance industry. 1968 Western Australia – Challenges for claims handling Meckering

While the local insurance industry has experience with hand­ling mass claims due to cyclones, hailstorms 5.4 Magnitude and floods, the earthquake engineer- 1954 ing community is not very strong. So South Australia – the handling of earthquake losses Adelaide would also be a great challenge for insurers – despite the steep learning curve insurers experienced while 7.2 dealing with the Christchurch earth- Magnitude quakes. 1941 Western Australia – Meeberrie

8 Munich Re Expect the unexpected Earthquakes

Maps of earthquake epicentres in Australia and New Zealand

Earthquake epicentres since 1840

Australia Source: Munich Re

Magnitude 5.0 5.1 – 6.0 6.1 – 7.0 > 7.0

Brisbane

Perth

Adelaide Sydney Melbourne

Earthquake epicentres since 1840

New Zealand Source: Munich Re

Magnitude 5.0 5.1 – 6.0 6.1 – 7.0 Auckland > 7.0

Wellington

Munich Re Expect the unexpected 9 Earthquakes

When a city fights back – New Zealand earthquake sequence 2010–2011

New Zealanders showed resilience Yet a far more devastating earth- in the aftermath of the quake that quake with 185 deaths in early 2011 rocked Christchurch in the autumn challenged the community’s spirit. of 2010. Despite aftershocks, the Four years after this complex and ­prevailing attitude was positive and unanticipated series of events, recon- people were eager to pick up the struction efforts and insurance settle­ pieces and get on with their lives. ment processes are still under way.

Container village in the CBD: Exclusive online content Christchurch has made a virtue of necessity. Lessons learned from the Christchurch earthquake: www.munichre.com/ausnz/ christchurch

10 Munich Re Expect the unexpected Resilience

The second report released in 2014 – “Building an Open Platform for Natu- Stand by your ral Disaster Research Decisions” – examined the criticality of natural disaster data for mitigation invest- ments and demonstrated that by pro- country – together viding improved access to accurate relevant data and research, add­ itional savings of A$ 2.4bn could be for a resilient generated. Tremendous savings through mitigation­ investments Australia In total, the two reports highlight potential savings to the Australian economy of up to A$ 14.6bn by 2050 Jim Parkes, Client Manager through regular well-planned mitiga- tion investments. This series of reports will be continued with further Recognising that New approaches to mitigation and papers, for example covering the pre-disaster investment urgently issues of building resilient infrastruc- governments acting needed ture and compiling social resilience alone cannot address guidelines. This remarkable coalition is helping the challenge of natural shape Australia’s future by releasing The work of the Australian Business disaster management, evidence-based reports to govern- Roundtable earns international ment, industry and the media that recognition­ the Australian Business highlight the unsustainable cost of Roundtable aims to natural disasters to life, property and Based on its work since 2012, the the economy, and outline a new Australian Business Roundtable was support the develop­ approach to pre-disaster invest- awarded the Australian Govern- ment of a more sustain­ ments in Australia. ment’s 2013 National Resilient Aus- tralia Award, as well as the Certifi- able, coordinated By pursuing key recommendations cate of Distinction at the presti­gious national approach to put forward in the Roundtable’s com- 2015 United Nations Sasakawa missioned papers, economic costs Award for Disaster Risk Reduction. making communities can be materially reduced to take The Australian Business Roundtable more resilient and the long-term pressure off government is the first private sector organisation budgets. More importantly, a safer to win in the 30-year history of these Australian people safer. Australia can be created by building awards. Munich Re is among resilience against the trauma and loss of life that all too frequently con- [email protected] the founding members. front many of our communities when a natural disaster strikes.

The Australian Business Roundtable Costs of natural disasters on the for Disaster Resilience & Safer Com- economy will skyrocket in the next munities was formed in December few years 2012 by the Chief Executive Officers Exclusive online content of the Australian Red Cross, Insur- The Roundtable’s first 2013 White ance Australia Group, Investa Prop- Paper “Building our Nation’s Resil- White papers of the Australian erty Group, Munich Re, Optus and ience to Natural Disasters” estimated Business Roundtable: Westpac Group. The CEOs created that natural disasters cost the Aus- www.munichre.com/ausnz/ the Roundtable because they all con- tralian economy A$ 6.3bn per year, resilience sider having resilient communities and forecast costs to rise to A$ 23bn that can adapt to extreme weather annually by 2050. The research also events to be of national importance. demonstrated that carefully targeted This is the first time such a broad resilience investments of A$ 250m spectrum of organisations has come per annum have the potential to gen- together to champion this issue. erate budget savings of A$ 12.2bn for all levels of government and would reduce natural disaster costs by more than 50% by 2050.

Munich Re Expect the unexpected 11 Climate Climate change on the rocks – did you know …

Peter Höppe Head of Geo Risks Research/Corporate Climate Centre

12 Munich Re Expect the unexpected Climate

… that the sea level in … that the number of … that the number Sydney will rise more tropical cyclones could of days of extreme than on the coast of reduce considerably? bushfire danger in Iceland? southern and eastern Current climate models show that the number of cyclones occurring in Australia could almost Global warming is causing the sea the northeast of Australia could fall triple by the end of the level to rise – even as a result of ther- by 15% to 35% due to climate mal expansion of the water. However, change. The reduction will be in century? the extent of the rise varies in differ- storms of moderate to medium ent ocean regions and at the coasts, intensity. The number of very intense Climate models driven by the most as a result of the ocean currents, storms, on the other hand, will extreme scenario recognised in the ­vertical land movements, and other increase and, along with it, the risk IPCC report have produced this factors. The sea level around Iceland for insurers. prognosis. The scenario assumes the will only rise about half as much as in continuation of the current path of Sydney! … that the frequency of emission levels. … that the melting of the extreme droughts in [email protected] Australia could increase https://de.linkedin.com/in/ ice in the Arctic Ocean peterhoeppe/de will not cause the sea by one and a half times level to rise at all? by the end of the 21st century? The reason: ice masses floating in water are in a state of equilibrium This result of current climate models, with the surrounding fluid, technically referring to events in which pre­ termed buoyant stability. The effect cipitation is two standard deviations of this can be observed when having below the average, will present major Exclusive online content a drink “on the rocks”. When the ice challenges to the agricultural sector cubes melt, the level of the fluid in and water supplies. the glass does not change – unless you take a sip of course. … that the number of days a year in Adelaide with daily top temperatures of 35°C or more may increase

from the current 20 to More information on the exam- as much as 47 by the ples above and a detailed analysis of how anthropogenic climate end of this century? change, coupled with exposure development, will significantly Current climate models project alter the insurance industry’s risk increases in other cities, such as maps over the coming ­decades Cairns from 3 to 48 days, or Perth by our leading climate expert, from 28 to 63. Dr. Eberhard Faust at: www.munichre.com/ausnz/ research

Munich Re Expect the unexpected 13 Cyclones Turbulence on the Gold Coast

Doris Anwender Munich Re expert on cyclones

14 Munich Re Expect the unexpected Cyclones

Severe cyclones rarely The east coast of Queensland, where the state capital of Brisbane is situ- Brisbane 1960 reach the east coast of ated, has grown dramatically over southern Queensland – the last 50 years. The population has soared and led to massive urban the last time was in the expansion. Fuelled by the rising 1970s. However, current worldwide demand for raw materials, southeast Queensland has seen climate change predic­ strong economic development and is tions and increa­sing currently Australia’s fastest-growing region. The Australian Bureau of Sta- concentrations­ of values tistics expects the population in and are making risk around Brisbane to grow by 34–57% over the next 20 years. researchers sit up and take notice, because Tourism in the region is also boom- ing. Gold Coast, for instance, with should a storm event over 500,000 residents, has become Brisbane 2011 occur, the consequences Queensland’s second-largest “city” or urban region. It also has the second-­ could be devastating. fastest growing population, again after Brisbane. Thanks to two major airports in Brisbane and Coolangata, this holiday paradise can be reached quickly and conveniently. The Pacific Highway, completed in 2000, addi- tionally connects the tourist hub to Brisbane.

Climate change will bring severe cyclones closer to Brisbane

Brisbane today has a Greater Brisbane is constantly population of over 2 million. exposed to the risk of tropical storms In 1960 it was 700,000. and their outer bands. With its high concentration of values, this makes Greater Brisbane one of the regions with the highest loss potential. Though most major storm events have so far been confined to the northern part of Queensland, Brisbane As the probability of has still had several uncomfortably #cyclones hitting Bris- close brushes with strong cyclones. bane increases, insurers Furthermore, as climate change need to prepare for takes hold, the Queensland region is #major losses and emer- expected to see an increase in long- gency plans #cost explo- lived cyclones, which will increas- sion, #climate change. ingly shift southwards. According to current climate research, the number of storm events is likely to decrease, but their severity increase. Based on these indicators, the possibility of a major event in and around Brisbane does indeed exist.

Munich Re Expect the unexpected 15 Cyclones

Major losses in the 1970s Population growth Gold Coast 1961–2011 In recent decades, very few cyclones have made landfall in Greater Bris- bane. Nevertheless, there is an 500,000 ever-present possibility of a powerful storm event. For example, the region 450,000 experienced several very heavy storms 400,000 in the 1970s. In 1972, Cyclone Daisy resulted in an insured loss of A$ 116m 350,000 in the Brisbane and Gold Coast region. 300,000 In 1974, Cyclone Wanda caused insured losses amounting to A$ 2.6bn. 250,000 Zoe followed soon after with an 200,000 insured loss of A$ 171m (all figures indexed to 2011, ICA). 150,000

100,000 Such events are rare because of strong westerly winds along the lati- 50,000 tudes of Brisbane, which break down 0 the vertical structure of a cyclone. 1961 1971 1981 1991 2001 2011 However, the precondition for the development of a tropical cyclone, namely a high temperature of over Source: Queensland Government 26°C in the ocean’s surface layer to Statistician’s Office, Australian a depth of at least 50 m, also exists Bureau of Statistics south of Brisbane in summer. This situation can not only promote the

Loss potential for Brisbane and Gold Coast Brisbane Gold Coast

Due to the steady increase in values Total sum insured (TSI) A$ 400–425bn A$ 150–180bn along the Queensland coast, the sums insured, and thus also the loss poten- Loss potential on median TSI A$ 412bn A$ 165bn tials in this region, have increased greatly in recent decades. The follow- 1% A$ 4.1bn A$ 1.7bn ing percentage values can serve as a basis for loss estimates. Even in 2% A$ 8.2bn A$ 3.4bn regions like Brisbane, where tropical cyclones are a rarity, losses amount- 3% A$ 12.4bn A$ 5.0bn ing to 5% of the total sum insured are possible. 4% A$ 16.5bn A$ 6.6bn

The figures are not based on modelled 5% A$ 20.6bn A$ 8.3bn results.

Source: Munich Re, status 2013

16 Munich Re Expect the unexpected Cyclones

development of a cyclone, but also The region has experienced many near Australian cyclone scale help to sustain an approaching one. misses, as in 1967, for example, when In other words, local winds at higher category 3 Cyclone Dinah veered altitudes need only be weak, for away just off the coast. If a storm of Category Wind speed example due to a southward shift in this magnitude were to pass over the the west wind zone, for a severe region today and not turn back, we 1 90–124 km/h cyclone to develop and make landfall would have a scenario with high in the region around Brisbane. wind speeds, flooding and a storm 2 125–164 km/h surge of catastrophic proportions. Loss potential rising in the region 3 165–224 km/h Large-loss amplification – Cost Munich Re calculated the loss poten- explosion after a storm 4 225–279 km/h tial existing in Greater Brisbane in a Best Practices Study in 2013: based Events like Hurricane Katrina have 5 ≥ 280 km/h on a stochastic set of cyclones, the shown us that the loss directly asso- 1,000-year insured loss that would be ciated with a strong storm can rise expected to occur in Brisbane in the significantly due to secondary factors. Source: Bureau of Meteorology, event of a category 4 cyclone was This is referred to as post-loss or Australia calculated to be a lower two-digit large-loss amplification. The central ­billion A$ amount. factor in this case is the failure of the infrastructure.

Tropical cyclones in Australia

Area affected by tropical cyclones in Australia and New Zealand.

Source: NATHAN Risk Suite

Munich Re Expect the unexpected 17 Cyclones

Gold Coast’s geographical features make it extremely vulnerable to storms and flooding. The region’s flat surface allows storms to sweep over- land at full force. Meanwhile, the lagoon landscape brings an increased chance of flooding which extends far inland.

Many businesses and supermarkets are located in the basements or semi-basements of high-rises and would no longer be accessible in the event of a major catastrophe.

18 Munich Re Expect the unexpected Cyclones

Destroyed transportation network Further loss drivers Experience with major catastrophes like Katrina has borne out the impor- In moderate catastrophes, the trans- Failed energy provision, water sup- tance of emergency plans. Insurers portation network is usually restored plies and telecommunication ser- have learned that when a major dis- in just a few days. After more serious vices can compound the situation aster strikes or several loss events events, however, it can be months further and even lead to serious coincide, they must be in a position before roads, railways, airports or health risks. Furthermore, additional to provide additional loss adjusters, ports are back in full operation. losses must be expected from looting engineering experts and claims man- and the destruction of buildings and agers. In emergency planning, the The destruction of infrastructure fre- property. It can be months before most extreme, exceptional situations quently leaves the hardest-hit areas commercial businesses and service must be anticipated, e.g. several inaccessible. Transporting relief sup- providers are able to resume their events in different regions within a plies and rescue services to these activities. Some businesses do not single year. areas is impossible or at best survive the catastrophe at all. extremely difficult. Hotels, restau- State of alert remains in effect rants and grocery stores are closed. What insurers must be prepared for Relief workers, repair crews and loss In general, no reduction in the risk of adjusters must find accommodation In the event of major or complex cyclones in the southeast Queens- outside the disaster areas and travel catastrophes, insurers face tremen- land region can be expected over the up to several hours a day to their dous financial and personnel-related next few years. The rising probability places of assignment. Delays in relief challenges. For example, the inacces- of heavy storms, combined with the supplies, loss adjustment and repairs sibility of heavily damaged areas growth of the region, will inevitably are the result. Buildings sustain fur- means that loss adjusters often begin be accompanied by an increase in ther damage, for example from by investigating smaller losses in loss potential. Furthermore, insurers mould, which can have terrible outlying areas. In other words, when must try to be as well prepared as effects on their condition. estimating losses and calculating possible for major catastrophes, reserves, an insurer must bear in ensuring the availability of corre- Scarcity of resources mind that the worst losses will not be sponding emergency response plans assessed until late in the adjustment and sufficient human resources. Because of the increased demand process. and poor transportation conditions, [email protected] building materials become scarce, Extreme pressure on loss adjustment https://de.linkedin.com/in/ which in turn pushes up prices. The dorisanwender demand for skilled workers also Exceptional situations like a increases. Lucrative major contracts storm-related disaster place a par- are usually given priority. Above all, ticularly heavy burden on loss adjust- private buildings that have suffered ers. For instance, in the aftermath of just minor damage remain unre- Katrina, staff had to be replaced with paired for an extended period, during fresh teams several times during the which time the damage gets worse. loss adjustment process. In such cases, insurers are called upon to The increased demand for skilled ensure they have the necessary per- workers also causes wages to rise. sonnel available. What is more, as skilled workers are in short supply, poorly trained work- men are hired who do not repair the damage professionally, leaving the Exclusive online content buildings even more vulnerable when the next storm strikes. This “demand How cyclones form: surge” increases the cost of recovery www.munichre.com/ausnz/ by up to 40% compared to standard cyclones conditions – as we learned in the aftermath of Katrina.

Munich Re Expect the unexpected 19 Risk In the context of natural disasters, the scientific community agrees that risk is the product of (the probability of) a hazard and its adverse con­ sequences. Where there are no people or values that can be affected by a natural phenomenon, there is no risk. Similarly, What is an event is only termed a disaster if people are harmed and/or their risk? possessions damaged.

Wolfgang Kron Munich Re expert on risk communication

20 Munich Re Expect the unexpected Risk Drivers of risk

Circular graphs are used to describe the dependency of Risk [R] on the variables Hazard [H], Exposure [E] and Vulnerability [V], with vulner­ ability being the damageable expo- sure. 100% vulnerability means an expected total loss. The risk is repre- sented by the area intersection of H, E and V.

NO RISK A strong storm in an uninhabited region (no exposure affected)

[H] [E]

LOW RISK A strong storm in a well-prepared region (low vulnerability)

[H] R [V] [E]

HIGH RISK A strong storm in a poorly prepared region (high vulnerability)

[H] R [V] [E]

Munich Re Expect the unexpected 21 Risk

The risk formula

The intensity and frequency of a ­natural phenomenon (Hazard) is only one of three factors which determine the overall risk. The amount of values present in the area concerned (Ex­ posure) as well as their loss suscep­ tibility (Vulnerability) are crucial for the resulting risk. Hence, the risk for- mula can be written as a function of these three quantities. With regard to Risk the insured risk, a fourth factor, insur- ance penetration, also plays a role. The integral over the hazard All factors that determine the risk are density function multiplied by variable. While we cannot influence the corresponding conse- occurrence and intensity of a natural quences. phenomenon, we may control the exposure by avoiding hazard-prone areas. Vulnerability can be reduced by increasing the structural resist- ance of objects, with measures depending on specific hazards. A higher insurance penetration gener- ally increases the geographical spread of risks, but may also increase the probability of higher accumula- tion losses. R = [H] x [E] x [V] x [I]

Exclusive online content [H]azard

The degree of hazard, i.e. the An interactive version of our infographic: full range of intensities of www.munichre.com/ausnz/ threatening natural phenom- understanding-risk ena, including their probabil­ ities of occurrence.

22 Munich Re Expect the unexpected Risk

[E]xposure

The total exposed values or values at risk – real/personal [I]nsurance property – present at the loca- tion affected/threatened. penetration The proportion of insured values at risk.

R = [H] x [E] x [V] x [I]

[V]ulnerability

The degree of vulnerability, i.e. the lack of resistance to damaging forces, or the ratio of exposure that can poten- tially be damaged.

Munich Re Expect the unexpected 23 Climate Natural climate variability

Eberhard Faust Munich Re climate expert

24 Munich Re Expect the unexpected Climate

Extreme droughts, Australia and New Zealand are exposed El Niño and La Niña floods and tropical to natural climate oscillations which have a strong influence on the activity levels of In the El Niño phase, the trade winds, cyclones: atmospheric atmospheric natural hazards. The ENSO which usually blow from a southeasterly natural hazards and cycle (El Niño/Southern Oscillation), in direction, drop or even reverse direction particular, impacts the entire region, caus- and begin to blow from the west. This heavy losses seem to ing variations that extend over many moves the pool of warm surface water months. The phenomenon is caused by located to the northeast of Australia east- go hand in hand. In two components of the climate system in wards in the direction of the central and the equatorial Pacific region – the ocean eastern equatorial Pacific, thereby shifting many cases, these and the atmosphere – and the complex the associated regions of convective pre- weather events can be interaction between them. The way in cipitation. Dryness and warmth in the which these components influence one northeast and east of Australia and in east- attributed to natural another and the extent of this influence ern parts of the New Zealand islands are cause climate conditions to oscillate the result. climate variability. The between El Niño, La Niña and the neutral deviations can last for state that lies between the two in a pattern In a La Niña phase, the effect is reversed: referred to as the ENSO cycle. the trade winds grow stronger than the Was während einer El-Niño-Phase passiert long-term mean, shifting the warm surface weeks, months or even Die Passatwinde sind während einer El-Niño-Phase stark abgeschwächt beziehungsweise wehen gegenläufig. Warmes Oberflächenwasser treibt von Indonesienwater längs to just eines off äquatorialen the coast Korridorsof Indonesia and years, and can present bis vor Südamerika zurück und vergrößert dort die Mächtigkeitnortheastern der warmen Australia. ozeanischen Large Deck quantities- of schicht. Das kalte Tiefenwasser gelangt nicht mehr bis inthe die oberstewarm surfaceWasserschicht. water Die evaporate warmen here, the insurance industry Wassermassen verdunsten nun im östlichen tropischen Pazifikgreatly und increasing vor Südamerikas precipitation Westküste, in the with immense chal­ was dort für viel Regen sorgt. In Indonesien und angrenzendennortheast Gebieten and wird east es of eher Australia. trocken. lenges in terms of risk management. El Niño phase

Dry air umgedrehte Windrichtung Moist air

Dry air ReversedMean wind sea leveldirection Moist air Warm water

Mean sea level Cold Warm water South Asia deep water America

West Thermocline position Thermocline East Cold Asia/ in neutral phase South deep water Knowing about natural Australia America climate variability and West Thermocline position Thermocline East #climate change, and Was während einerin La-Niña-Phase neutral phase passiert their predictable Das Gesamtmuster ist ähnlich zur neutralen Phase, nur dass die Passatwinde deutlich verstärkt aus östlichen Richtungen wehen. Die durch Windschub längs des Äquators vor Indonesien wie das impacts, is essential in dicke Ende eines Keils mächtig gewordene Warmwasser-Deckschicht sorgen für einen besonders mastering risk manage- signifikanten Niederschlagsüberschuss an den Küsten Indonesiens und benachbarter Gebiete, ment challenges. Lahingegen Niña phase herrscht starke Trockenheit im östlichen äquatornahen Pazifik und an der Westküste Südamerikas.

Moist air Strong trade winds Dry air

Mean sea level Warm water

Cold South Asia/ deep water Australia America West Thermocline position Thermocline East in neutral phase

Munich Re Expect the unexpected 25 Climate

Shift in activity patterns Indian Ocean Dipole Thunderstorms

Severe thunderstorms can only occur Negative phase of the Indian Ocean Dipole under specific atmospheric condi- tions. Only in smaller subregions does the ENSO cycle cause a marked change in the frequency with which conditions conducive to severe thun- derstorms develop in Australia − for Warm waters instance, in a region of eastern Aus- Cool tralia encompassing the southern Timor Sea waters half of Queensland, New South Increased Pacific Ocean Wales and Victoria. During a strong flow of El Niño event, conditions conducive warm to severe thunderstorms occur much moist air less frequently here than under La Niña or neutral conditions. Decreased Indian Ocean rainfall However, the ENSO phases generally Increased do have an effect on the geographical rainfall distribution of severe thunderstorms. This is because humidity decreases in southeastern Australia during El Niño episodes. As a result, severe Positive phase of the Indian Ocean Dipole thunderstorm activity decreases con- siderably in the coastal regions of New South Wales and along the Great Dividing Range, and increases in southeast Queensland. Activity also increases in extensive parts of Western Australia, including the region around Perth. During La Niña Cool waters Warm episodes, severe thunderstorm activ- waters Pacific Ocean ity in eastern Australia shifts much Decreased further southwards and inland: this flow of increases the frequency of severe warm thunderstorms in the south of New moist air South Wales and the north of Vic­ toria, including the area around Indian Ocean ­Melbourne. Meanwhile, severe thun- Decreased derstorm activity drops in the rainfall ­southeast of Queensland and the northeast of New South Wales.

Cyclones In the negative phase of the Source: Munich Re, in the style Indian Ocean Dipole (IOD) of Caroline Ummenhofer, During an El Niño event, cyclones (upper panel), an increased http://ummenhofer.whoi.edu/ tend to develop further to the east atmospheric transport of warm southeast-australian-drought/ and closer to the equator. As a result, moist air occurs from the Indian Ocean warm pool area into fewer storms hit the Australian coast western and southern parts of than under La Niña conditions, when Australia, reaching the south- the storms develop much closer to east. As a ­consequence, rainfall the continent. By contrast, the is increased in these regions cyclone hazard increases for the (green shadings). In contrast to islands of Oceania to the far north- this, the positive IOD phase east of Australia during El Niño (bottom panel) leaves Australia much drier (less rainfall over phases. More, and above all stronger, land indicated by red shading). cyclones then develop in this region. Their high wind speeds and storm surges can wreak untold damage on the islands.

26 Munich Re Expect the unexpected Climate

The second force – The Indian Ocean The interaction of ENSO and IOD Predictability of natural climate Dipole oscillations The natural climate oscillations can Apart from ENSO, a further natural sometimes interact in complex ways, El Niño, La Niña and IOD phases can climate oscillation also has a strong influencing one another. This makes be forecast on a seasonal basis. influence on extra­tropical and tropi- for considerable variability from one Based on climate models, institutes cal Australia: the Indian Ocean Dipole year to the next: for instance, in provide forecasts with a moderate (IOD). Its impact can combine with southeastern Australia and in the predictive skill for lead times of ENSO effects, diminishing or Murray-Darling Basin, monthly rain- about four to six months. These fore- increasing their intensity. The IOD fall can increase by up to 25 mm casts are much better at predicting is characterised by an oscillation of ­during a concurrent La Niña and the sign of an imminent phase than mean annual sea surface tempera- ­negative IOD event. at predicting the intensity. Australia’s tures. These natural oscillations Bureau of Meteorology provides an show a dipole pattern between the When an El Niño phase coincides overview of forecasts on its website. east of the Indian Ocean off the coast with a positive IOD phase, this same of Sumatra and the west of the ocean region is hit by severe drought. How- Conclusion basin – particularly in the period ever, a precipitation deficit or surplus from May to November. The positive can also ensue in the eastern half of Improved forecasting of natural cli- IOD phase (pIOD) causes low tem- Australia when an El Niño or La Niña mate oscillations means that insur- peratures in the east and high tem- event occurs on its own during a neu- ers’ risk management teams can peratures in the west of the Indian tral IOD phase. ­prepare more efficiently for regional Ocean. In a negative IOD phase changes in weather-related loss (nIOD), the pattern is reversed. Climate oscillations also affect the probabilities. For one thing, it helps risk of bushfires: in southeastern them to plan sufficient human The Big Dry and other droughts Australia, particularly in Victoria, resources for loss adjustment, and to the risk is higher during positive ensure that appropriate emergency Long periods of severe drought in IOD phases and during El Niño plans are in place. What is more, the Australia in particular are associated events. There is a steep rise in the knowledge about climate phases with IOD oscillations. The Federation risk of bushfires here when these could also be used to inform and Drought (1895–1902), the World War two ­climate conditions occur raise awareness among policyhold- II Drought (1937–1945) and The Big simult­­­­­­­­­­­ aneously.­ ers and the general public, providing Dry (1995–2010) are examples of knowledge-based incentives to take such events. Recent research has In the eastern parts of the New Zea- preventive measures: for example, in revealed the causes of these pro- land islands, drought episodes pri- response to risks in potential flood- longed droughts in southeastern marily occur during summer El Niño plains or bushfire areas, where it is Australia, which can extend over sev- events. Winds from the west prevail essential to ensure an adequate dis- eral years and affect other regions in during these periods, bringing pre- tance from vegetation. the southwest and south of Australia: cipitation to the western coasts and the drought episodes are primarily dry weather to eastern parts. There is [email protected] associated with positive or neutral a greater risk of forest fires during IOD phases. Negative IOD phases these phases. transport large quantities of moisture from the tropical eastern Indian El Niño and La Niña also have a dom- Ocean in a southeasterly direction inant influence on the development towards western, southern and of intense precipitation events. This southeastern Australia. emerged, for instance, during the recent intense precipitation events Exclusive online content However, the drop in overall precipi- between 2010 and 2013. During tation in the cool season recorded La Niña phases and negative IOD How to meet the challenges of over the course of the last 50 years is phases and when the two phases long-term climate change: unlikely to be the result of natural coincide, there is a greater risk of www.munichre.com/ausnz/ ­climate oscillations alone. It is prob­ heavy rainfall in the eastern half of research able that climate change was already Australia. However, 10–20% of the starting to take effect, reducing the heavy rainfall events which hit the frequency of the cut-off lows which Brisbane area between 2010 and bring rains to the southwest, south 2011 can most likely be attributed to and southeast of Australia, and to higher sea surface temperatures in Tasmania. the north. Indeed, it is possible that we are already seeing the additional influence of climate change.

Sources: See page 52

Munich Re Expect the unexpected 27 Floods Never underestimate troubled water

Wolfgang Kron Munich Re expert on floods

28 Munich Re Expect the unexpected Floods

Flood is probably the Despite regular loss events, the con- Varying risk sequences of flooding are still often natural peril Australia underestimated – both in Australia Even if nowhere is entirely safe from is most aware of. Major and around the world. One reason for flooding, the risk varies greatly from this is that almost no one expects the region to region in Australia. Major floods frequently isolate unexpected, even if it happens often, loss occurrences are to be expected towns, create major dis­ as is the case with this phenomenon. in Queensland and along the entire Floods, in particular the flash floods east of the country. The costliest ruptions to road and rail common in Australia, can happen flood of recent times hit Brisbane – links, and can cause anywhere – also in extremely dry although the city appeared to be very regions. This element of surprise well protected by two large dams. It many fatalities. Wide­ makes these events even more dan- would be false to believe that the spread damage to gerous than they would otherwise water level of 4.56 m in January 2011 already be. was the worst case that can be houses and business expected. In the past, Brisbane has premises as well as Flood appears controllable experienced much higher flood levels (e.g. 8.35 m in 1893 and 5.45 m in losses in agri­culture are People tend to be less frightened of 1974). The Wivenhoe and Somerset common. Practically floods than of other natural hazards. dams cannot offer any guarantee Unlike earthquakes, for example, it is that these levels will not be reached every year there are assumed that a flood can be con- again. flood losses, sometimes trolled by appropriate measures. Most people think that when a flood While it is mainly tropical cyclones with devas­tating happens, they will still be able to that bring huge volumes of rain to consequences. ­barricade themselves in or escape Queensland, in New South Wales it safely with their belongings. Precau- is the East Coast Lows that bring tionary measures taken by the high wind speeds and copious rain- authorities, such as storm and flood fall. Australia has suffered a lot in this warnings or flood control structures, region, and has taken great steps to also give people a sense of security. mitigate the consequences from future events, but they cannot be But experience shows: extreme events totally prevented. can neither be entirely prevented, nor can they be completely controlled. Along the entire northern and west- Their frequency is likely to increase ern coasts of Australia, from Bris- as climate change progresses. bane to Perth, tropical cyclones with their enormous amounts of precipita- tion can occur and cause flash flood- ing. Large-scale floods and losses in #Flood events in Aus- the billions are most likely in the tralia can be mitigated densely populated area of Perth, but never prevented. should a cyclone hit at full force. Politics and insurance need to partner closely #climate change, #miti- gation

The biggest floods since 2005

Flood periods Affected region(s) Overall losses Insured losses (A$) (A$) January to Northeastern Australia, 2.2bn 1.5bn February 2008 especially Queensland December 2010 to Eastern and northeastern 6.8bn 2.4bn January 2011 Australia: incl. the Brisbane flood and the Toowoomba/ Lockyer Valley flash floods; January 2013 Northeastern Australia 2.2bn 1.1bn

All losses given in original values at the times of the events

Source: Munich Re NatCatSERVICE

Munich Re Expect the unexpected 29 Floods

There can even be flooding in the combined storm surge and wave arid middle of Australia, although action ever to hit Australia was dur- Rainfall deciles for October to this is rare, invariably very localised ing Cyclone Mahina, which struck December 2010 and of little economic consequence Bathurst Bay in March 1899 and given the low concentration of values claimed over 400 lives. The ultimate involved. For example, in January high-water line was estimated to be 2015 more than 200 mm of rain fell 14.6 m – still claimed by some to be in the space of just a few days in the world record. Alice Springs. Several buildings were flooded and one person drowned. Building resilience

Short rivers The enormous economic and finan- cial losses caused by floods are a Apart from the Murray-­Darling basin, considerable burden for Australia. there is no major river system in Aus- That is why it has put a lot of effort tralia. That is why river floods often into containing the risk in recent behave in a similar way to flash years. Four components of preven- floods, providing little or no advance tion are of key significance: warning. The flood wave in the Bris- bane River in 2011 also rose very rap- 1. idly. Similar events are possible on Flood prevention is designed to nearly all Australian rivers, because ­prevent dangerous floods from Decile they generally run a short route to the occurring, or at least to make it more sea and have very few tributaries, ­difficult for them to occur (measures Highest value on allowing flood waves to approach such as forestation or removing record quickly and suddenly. The usual fea- impermeable surfaces in the catch- 10 Very much ture of river flood remains: flooding ment area to increase local water above average caused by the overflowing of a river storage). 8–9 Above average 4–7 Average (in contrast to local rainfall flooding). 2–3 Below average Hazard zoning and flood protection 2. 1 Very much are therefore highly relevant aspects. Flood control is supposed to prevent below average high-value areas from being flooded Lowest value on Risk on the beach (e.g. dykes, detention basins, dams). record

Most coastal regions of Australia are 3. Deciles represent a ranking. exposed to the risk of storm surges. Loss mitigation limits the material Oct.−Dec. 2010 rainfall in On the east coast they can arise in losses if the flooding of a building decile 10 means that it belongs to the top 10% of connection with East Coast Lows, cannot be prevented (e.g. flood- all historically recorded and on the northeast, north and west proofing, evacuation). Oct.−Dec. rainfall depths. coasts as a result of cyclones. The Decile 1 means it was within fact that Australian cities have 4. the lowest 10%. largely escaped storm surge Financial protection – usually in the catastrophes to date does not mean form of an insurance policy – protects Source: Bureau of Meteor­ that it will stay that way. It is pre- against financial ruin, enables imme- ology, Australia cisely this lack of negative past diate reconstruction and is a key exper­ience that has led to highly ­factor in managing risk and building exposed building developments near high resilience. beaches. An unfavourable storm con- stellation could easily put large parts The lack of warning and time to react of cities like Brisbane, Cairns, Darwin and the very limited options available or Perth under water, triggering for structural flood prevention and unprecedented losses there. On Aus- control in the case of flash flood tralia’s northern coast, storm surges events make loss mitigation almost can be higher than almost anywhere impossible and insurance particu- else on the planet. In 1887, a storm larly important. Flash floods gener- surge swamped the city of Burke- ally impact the immediate area close town, 30 km inland from the Gulf to where they arise, which makes of Carpentaria. The water level was them difficult to fully prevent, control about 5.5 m higher than the high- and mitigate against. However, est-ever mark recorded during a flood-proofing of buildings can effec- spring tide. In 1923, a 6.5 m water tively reduce the consequences of level was even measured on Groote moderate flash flood events. Eylandt in the Gulf itself. The highest

30 Munich Re Expect the unexpected Floods

A prudent, affordable and sustain­ control measures can be used to able development of flood plains and mitigate the risk. Insurance can What is a return coastal areas calls for risk-based be further used to minimise the flood control. To clarify: the protec- residual risk. In this regard, as insur- period? tive measures taken are always ers calculate premiums that are com- based on what is called a “design mensurate with the risk, mitigation flood”. The protection is then would have a positive impact on pric- A return period is the inverse value of designed to be effective up to that ing, and potentially on penetration of the exceedance probability and indi- high-water level. Here, irrespective of flood coverage. The frequently used cates the average time between what the region is used for, a stand- option of “disaster relief”, or swift events of the same intensity. Hence, ard protection objective is often pur- financial aid after catastrophes, is no there is a 1% (1/100) chance of an event sued, for example a 100-year return alternative. It rewards those who with a 100-year return period being period. But it does not make sense to have not taken precautions, thus equalled or exceeded in any given subject all regions to the same flood undermining all efforts to protect year. This does not permit any fore- probability. Risk-based flood protec- against risk and losses. Much more cast to be made about the next event. tion minimises the overall risk much preferable would be financial incen- If a flood protection structure is built more efficiently. Many countries have tives from the state and local govern- on the basis of a 100-year design already started rethinking their ments to invest in mitigation and flood, it (theoretically) does not offer approach here. Munich Re supports protection activities, so that everyone protection against a 150-year event. this re-evaluation process and pro- can afford cover, and so that the vides the required local risk know­ insurance industry can develop ledge about the development of ­suitable products. Putting pressure ­natural hazards, for instance with on insurers to bear the risks on their Exclusive online content NATHAN Risk Suite. own through discounted premiums that do not cover costs would distort Government and insurers need to the market and probably prompt work together some providers to withdraw entirely.

There is a wide range of products Conclusion providing flood cover available in Australia. The insurance ratio also The natural peril “flood” and its seems reassuring at first glance: potential consequences can be sig- around 90% of insured homeowners nificantly reduced by taking the right (77% of all) have flood cover for measures, but there will never be building and/or contents. But upon complete protection against it. So it closer consideration, it becomes is all the more important not to apparent that most of the home­ underestimate the danger – espe- Flood volumes are huge owners in high-risk areas do not have cially of flash floods. Because at the flood cover. In New South Wales, end of the day, an insurance policy is In January 2011, the peak flow only 2% of these areas have full flood the only reliable way of at least mak- rate in the Brisbane River at cover. In Queensland, the figure is ing a new beginning possible in the the Brisbane Port Office was 5%. The reasons are easy to under- event of a loss or personal catas­ 12,400 m3/s. If you were to take stand: for an average house in these trophe. All homeowners, companies half of this flow and direct it onto areas, the premium for flood insur- and communities should be aware of a rugby field of about 10,000 m2 ance alone can be between this. The insurance industry can do (140 x 70 m), the field would be A$ 10,000 and A$ 20,000. By com- its bit by educating clients, giving submerged under 37 metres of parison, in Queensland the average them helpful tips on how to deal water in just one minute. The premium for all other perils together effectively with the risk, and provid- flow rate remaining in the river is in the order of A$ 1,000. ing comprehensive support. (6,200 m3/s) would still repre- sent a flood the likes of which Australia is not the only country that [email protected] only occurs every 20 years on struggles to make the flood risk in average. highly vulnerable areas insurable. The insurance industry cannot solve Find out how dams can be used this problem on its own; it needs to to control water masses in our be addressed by governments, web special at insureds and other stakeholders. www.munichre.com/ausnz/ Once the concept of total risk is flood understood, then prevention and

Munich Re Expect the unexpected 31 NATHAN Check into NATHAN Risk Suite

Jürgen Schimetschek Munich Re NATHAN expert

32 Munich Re Expect the unexpected NATHAN

Munich Re’s NATHAN What is the idea behind NATHAN Can you give us an example of how Risk Suite? to work with NATHAN Risk Suite? Risk Suite optimises the assessment of natural NATHAN (Natural Hazard Assess- In order to evaluate, for instance, the ment Network) Risk Suite supports exposure to bushfire within an insur- hazard risks, from entire users all around the world with cus- ance portfolio, the comprehensive portfolios down to tomised, innovative services for risk cover policies can be joined with the assessment. Its added value lies in NATHAN wildfire zones, providing individual objects at combining data on objects to be bushfire probabilities and intensities address level – world­ insured (locations) with the various estimated for postal codes or natural hazards. Its goal is to achieve addresses. On this basis, individual wide and now directly efficient pricing, identify accumula- loss forecasts can be determined, via smartphone and tion risks, optimise claims adjustment and precisely what percentage of the and derive options for prevention. portfolio is affected by or exposed to tablet. How does this bushfire can be calculated. With this work? Three questions What are the benefits of NATHAN transparent risk assessment, the Risk Suite for our clients? best-possible reinsurance protection for Dr. Jürgen Schime­ can be better defined. The informa- tschek, Geo Risks Modern integrated risk management tion also helps the risk assessors on requires a detailed knowledge of location to look more closely at the Manager, Munich Re. geographical environment. Geointel- risk situation of an insured object. ligence creates many possibilities. The full potential of this knowledge [email protected] can be realised if the applications are https://de.linkedin.com/in/ closely linked to the companies’ drjuergenschimetschek existing work processes. Natural hazard zoning, population distribu- tion maps, altitude information and loss data can be included in the clients’ own applications quickly via online connection. Most of this knowledge is now accessible via smartphone and tablet with our NATHAN Mobile application. Exclusive online content

More information about NATHAN Risk Suite and access NATHAN Risk Suite to NATHAN light: www.munichre.com/ausnz/ nathan

Bushfire (wildfire) hazard in southeastern Australia.

Source: Munich Re NATHAN

Munich Re Expect the unexpected 33 Hailstorms Icy cricket balls from above

Jan Eichner Munich Re expert on convective storms

34 Munich Re Expect the unexpected Hailstorms

Losses from severe Over the last 35 years, the accumu- a total insured loss of A$ 1.35bn, and lated losses (all in Australian CPI-­ a direct economic loss estimated at convective storms, in adjusted values for 2014) from severe A$ 1.8bn. particular from hail, convective storms total around A$ 14.8bn for insured losses and The Brisbane area is hit by hail- represent the most A$ 25bn for direct economic losses. storms quite frequently. The most frequent and (on an Compared to other perils in Australia, severe event affecting Brisbane prior only losses from flood events reach to 2014 occurred in 1985. It caused annual aggregate basis) similar dimensions. In terms of fre- insured losses of A$ 180m and about the highest losses for quency, losses from severe convec- A$ 360m in direct economic losses, tive storms make up about 50% of all which compares to A$ 540m and the insurance industry loss-producing natural hazard events A$ 1.1bn in CPI-adjusted values. in the entire Australian that occur in Australia. Hence, severe convective storm is the number one Two other recent prominent convec- nat cat business. Apart peril in nat cat business in Australia. tive storm events with large hail- from the Sydney hail­ stones and significant flash floods The costliest loss event in Australia occurred in March 2010, affecting storm of 1999, the five to date (after adjusting for inflation) Melbourne and Perth. Each event most expensive insured was the Sydney hailstorm of 1999. In generated insured losses of about the early evening of 14 April − untypi- A$ 1bn, with the Perth event becom- convective storm losses cally late in the season − a supercell ing the most expensive natural disas- in Australia have all storm had developed south of Syd- ter in Western Australia. ney in the area around Kiama. It occurred within the last moved northwards, parallel to the Thunderstorm damage five years. coastline, via Wollongong, Bundeena, straight to central Sydney and fur- Most of the losses from severe con- ther north to Palm Beach, up as far as vective storms in Australia arise from Gosford − a distance of more than hail and flash floods. Large hail causes 200 km. The storm produced hail- damage to the roofing, ­windows and stones the size of cricket balls (7 cm), claddings of buildings, as well as hull reaching its maximum intensity damage to automobiles, trains, around the eastern suburbs of Syd- planes and boats. Once a roof is ney. On its path, it caused damage to damaged, the accompanying rain more than 45,000 houses, 63,000 can cause substantial damage to the cars, 23 planes and countless boats, interior and the content of the resulting in more than 120,000 insur- ­damaged property. Small hailstones ance claims. The total sum of insured can be harmful to certain crops, losses reached A$ 1.7bn, and the esti- especially during the growing stage mated direct economic losses were of the agricultural cycle. Flash floods over A$ 2.3bn. Adjusted for inflation, inundate cars (which usually involves those values today would be equiva- a total loss of the vehicle), as well as Severe #convective lent to A$ 2.9bn and A$ 4bn respec- flooding basements and ground storms are the most tively. And accounting for the floors, damaging both the content expensive hazards with increase in wealth and assets since and the structure of an affected high frequencies and 1999 (using GDP growth as a proxy), building. great values at risk. the values could reach as much as #Mitigation is key #hail- A$ 4.6bn and A$ 6.3bn. In Australia, tornadoes − though storms, #flash floods potentially the most devastating of Brisbane hailstorm of 2014 produced the perils in a severe thunderstorm − the largest hailstones do not occur as frequently and intensely as to rival the losses from In November 2014, a rather short- hail and flash floods. Downbursts lived and localised but intense hail- and strong wind gusts also cause storm battered the Brisbane area. damage (in particular from flying The supercell produced hailstones debris). even larger than those in 1999, and hit central parts of Brisbane during Distribution of thunderstorms rush hour, causing damage to some 60,000 cars. The roofs, windows and Thunderstorms can happen through- claddings of more than 22,000 out the year, but the season when the homes and commercial buildings storms are most frequent and severe were damaged, and about 30 people is September to April. In addition to were injured. The number of insur- the annual season, other external fac- ance claims exceeded 100,000, with tors such as the El Niño Southern

Munich Re Expect the unexpected 35 Hailstorms

Oscillation (ENSO) in the equatorial The big red dots over the cities of in GDP. Such a denotation of the Pacific have a measurable influence Brisbane, Sydney, Melbourne and losses helps to identify high-risk on thunderstorm activity in Australia Perth mark the largest loss events. regions. These regions do not neces- (although the impact on the spatial The map confirms that the highest sarily coincide with the states that distribution of thunderstorm occur- meteorological probability of signifi- experienced the largest losses in rences is greater than on intensities). cant hail coincides with the historic absolute terms, or were prone to the large losses experienced in major most extreme convective storms The meteorological hazard proba­ metropolitan areas of Australia. from a meteorological perspective. bility, i.e. the areas where severe However, a clear correlation between hail and strong thunderstorms are Map 2 displays the annual insured the hazard/event map (1) and the risk most frequent, is shown in Map 1, loss per capita caused by severe con- map (2) can be found for the east together with the locations of historic vective storms for each state. The coast states, where the highest value hailstorm loss events from the values were calculated on the basis of around A$ 40 per capita and year Munich Re NatCatSERVICE data- of empirical insured loss data from appears in New South Wales (with a base. 1980 to 2014, normalised by increase good chunk of the A$ 40 stemming from the 1999 Sydney hailstorm). The small value assigned to the Aus- tralian Capital Territory (ACT) has to Map 1: NATHAN hail hazard be seen as an artefact derived from a Hailstorm loss events in Australia layer and the locations of hail losses registered in the lack of statistics on loss events in this Munich Re NatCatSERVICE small area. The true risk for ACT database (shown as dots). would not be different from the risk The large red dots indicate for the surrounding state of New the locations of ten major South Wales. hailstorms since 1980.

Source: Munich Re The correlation between the most NatCatSERVICE. highly exposed areas and greatest values at risk is unlikely to change, given that an increasing number of people want to live close to the coast and the majority of the population is concentrated in the eastern states. A reduction in the frequency of severe convective storm events cannot be expected, and owing to the ever-­ increasing exposure of values at risk, focusing on risk mitigation is para- mount. Investing in new technologies Map 2: Annual average and using materials that perform Insured per-capita losses from insured loss per capita from ­better in severe weather is therefore severe convective storms, key. Individual risk rating has a major convective storms broken down by state/terri- influence on risk behaviour, and it is tory. The values are colour-­ coded and range from

36 Munich Re Expect the unexpected Hailstorms

After accounting for loss Table 1: Most expensive (CPI-adjusted) convective storm losses in Australia normalisation, the 1999 Syd- since 1980, ranked by insured losses in A$ m of 2014 ney hailstorm could gener- ate an estimated insured loss of about A$ 4.6bn and reach an overall loss dimen- Date Affected area Losses (CPI-adjusted in A$ m) sion of up to A$ 6.3bn. Overall losses Insured losses 14.4.1999 Wollongong, Sydney, Central Coast 3,800 2,800 Source: Munich Re 27.11.2014 Brisbane 1,750 1,300 NatCatSERVICE 22.3.2010 Perth 1,800 1,200 6−7.3.2010 Melbourne, Mangalore, Shepparton 1,700 1,150 25.12.2011 Melbourne, Yarra Valley 1,100 810 9.12.2007 Illawarra, Sydney, Penrith 1,050 790 18−19.3.1990 Sydney 990 620 4−6.2.2011 Melbourne, Gippsland 730 540 18.1.1985 Brisbane 1,010 510 1−3.2.2005 Melbourne, Sydney, Newcastle, Brisbane 520 300

Fig. 1: Number of loss events Fig. 1: Number of convective storm events, split by perils as the dominant loss from convective storms in cause of each event Australia exceeding A$ 5m in normalised economic loss values. Part of the increase Number of events since the 1980s is driven by 10 improved reporting of loss 10 events (particularly smaller 8 loss events). 8 Source: Munich Re 6 6 NatCatSERVICE

4 4 Tornadoes Tempests 2 Hail 2

0 0 1980 1984 1988 1992 1996 2000 2004 2008 2012

Fig. 2: The grey curve dis- Fig. 2: Annually aggregated insured losses from convective storms in Australia plays the nominal losses as (in A$ m) occurred in the year of each event. The blue curve shows the same chart, adjusted for 5,000 inflation (Australian con- sumer price index or CPI). The red curve shows the 4,000 same losses normalised to today’s distribution of 3,000 wealth and assets, using Australian GDP growth as a 2,000 proxy for the development of wealth. The normalised losses reflect the loss poten- 1,000 tial if past events occurred today. 0 1980 1984 1988 1992 1996 2000 2004 2008 2012 Source: Munich Re NatCatSERVICE

Original losses (nominal values) Inflation-adjusted losses (2014 values) GDP-normalised losses (2014 values)

Munich Re Expect the unexpected 37 Risk modelling Despite improvements in the scientific under­ standing of natural perils and our ability to capture and analyse ever-increasing amounts of data, uncertainty remains a fundamental notion in catastrophe modelling – with a strong impact on risk and capital decisions.

Dreaming of the perfect model

Cameron Hick Client Manager

38 Munich Re Expect the unexpected Risk modelling

The role of stochastic catastrophe Beware of wrong accuracy Munich Re’s modelling approach models in the (re)insurance industry has evolved since the release of the In many countries, vulnerability Prudent exposure management and first commercially available models ­functions are mainly based on engi- understanding of risk is essential. in the late 1980s. In fact, recent events neering calculations and are not con- This is particularly the case for one of and new scientific advances have strained by loss data. The tendency the largest exposures an insurance shown us that the degree of uncer- to use ever-more detailed vulner­ company faces: natural catastrophe tainty in the results produced by ability functions for specific building risks. At Munich Re, we have devel- catastrophe models is even bigger characteristics is aggravating this oped our own proprietary internal nat- than originally thought. This has led issue and creates a sense of wrong ural catastrophe models that ­provide to a growing focus amongst regula- accuracy. The assumption in the us with an alternative view of risk. tors and rating agencies on how exposure data input to comply with companies address the issue of all these parameters has a major In addition to modelling capabilities, model uncertainty when making cap- impact on the modelling results. Munich Re provides expertise, global ital and catastrophe risk decisions. After catastrophes, it often becomes experience and a multitude of clear that wordings or valuation ­tailored reinsurance solutions for Uncertainty arises from all compo- aspects were not adequately ­frequency and severity exposures. nents of a catastrophe model. The addressed. Reinsurance can play a vital role in hazard calculation, the vulnerability an insurer’s capital management assignment and the representation Good corporate governance plan through capital enhancement, of the exposed values contribute to demands that companies explicitly substitution or efficiency. the overall model uncertainty. Even consider this uncertainty in model where a long historical record exists, outputs, with risk and capital deci- [email protected] its accuracy is often questionable. In sions reflecting this understanding. https://au.linkedin.com/in/ addition, the time span of such data Greater focus is being given to data cameronhick is far too short to cover the full range quality, reasonableness checks of realistic scenarios. The Tohoku against recent events, and the setting earthquake, for example, came as a of catastrophe reinsurance limits complete surprise to the modelling that make allowance for the uncer- companies, despite the very long his- tainty in the modelled outputs on torical record in Japan. which they are based.

“APRA wants each insurer to challenge itself about its governance and management of catastrophe reinsurance arrangements, and to adopt very good practice. We particularly want the insurer to understand the strengths and weaknesses of any models it uses, and the degree of uncertainty in the results produced. And we want model outputs to be complemented by significant further analysis. Lastly, we want the insurer to satisfy itself that the residual risk is truly within its appetite.”

Ian Laughlin – Former Deputy Chairman, Australian Prudential Regulation Authority

Munich Re Expect the unexpected 39 Bushfires Australia on fire

Markus Steuer Munich Re expert on bushfires

Markus Steuer

40 Munich Re Expect the unexpected Bushfires

In the southern half Bushfire hazard results from the complex interaction of highly dis­ The most significant of Australia, bushfire parate anthropogenic and natural is one of the biggest factors. It is the only natural hazard bushfires in history in which humans have a direct influ- causes of loss due to ence on the hazard situation. The natural hazards. The majority of fires near populated areas are caused by human activity, the risk can only be reduced smaller portion starts naturally by through close collabo­­­­r­­­- lightning. Besides accidental causes, a significant number of fires are ation­ between the ignited deliberately. authorities,­ home and In Australia, most of the overall and busi­ness owners, insured losses are caused by bush- industrial enterprises fires in the southeastern part of the country, where high hazard meets and the insurance high exposure. The Black Saturday The Black Saturday Fire industry. Victorian Fires in 2009 – the most (VIC) in 2009, which burnt recent major loss event for property 2 and casualty insurers – burnt some 4,500 km of land, killed 173 4,500 km2 of land, killed 173 people, people and destroyed some injured hundreds more and 2,000 homes. Overall losses de­stroyed about 2,000 homes. A$ 1.7bn, insured losses Domestic property and contents insurance accounted for around A$ 1.07bn (in original values). three quarters of the A$ 1.2bn insured property loss (indexed using CPI); The Ash Wednesday Fire commercial, industrial and farming (VIC/SA) in 1983, which policies ac­counted for one quarter. 2 Estimates indicate that 80% of the burnt 5,200 km , destroyed insured people affected by the fires some 2,400 homes and killed were underinsured. 75 people. Overall losses A$ 335m, insured losses Compared with other natural ­hazards, the share of total losses (destroyed A$ 176m (in original values). houses) is higher on ­average in the case of bushfires; therefore underin- The Tasmanian Black Tues- surance effects can be greater. Most day Fires (TAS) in 1967, houses are either destroyed com- pletely or left virtually undamaged – which burnt more than #Bushfirerisks are on there are only few structures with 2,600 km2, destroyed some the rise, #class actions, partial damage. Aside from underin- 1,400 homes and killed #mitigation, #climate surance, 13% of the destroyed resi- 62 people. Overall losses change. dential prop­ erties­ in the Black Satur- day Fires were not insured at all. A$ 35m, insured losses A$ 14m (in original values).

The Black Friday Fire (VIC) in 1939, which burnt almost 20,000 km2, destroyed more than 700 homes and resulted in 71 fatalities.

Munich Re Expect the unexpected 41 Bushfires

A significant share of the Normalised insured property losses 1980–2014: normalised insured property losses in Victoria (VIC), Percentage distribution per peril in each state South Australia (SA), and Tasmania (TAS) were caused by bushfires.

Normalisation removes the effect that increased wealth, i.e. the number of houses and NT their price over time, has on losses. This makes it possi- ble to compare losses that QLD occurred at different points WA in time.

SA Sources: ICA, Munich Re NatCatSERVICE NSW/ ACT Earthquakes Tropical cyclones Convective storms (incl. hail) VIC Winter storms Sandstorms Floods Bushfires TAS

A$ m Normalised insured 20,000 property losses caused by all natural disasters 15,000

10,000

5,000

0 NSW/ QLD VIC WA SA NT TAS ACT

Since the devastating 1967 Normalised insured property losses 1967–2014 Tasmanian fires, about half of the normalised insured caused by bushfires property losses were caused in Victoria (VIC) and one quarter in New South Wales and the Australian Capital A$ m Territory.

2,500 Sources: ICA, Munich Re NatCatSERVICE 2,000 WA VIC 1,500 TAS NSW 1,000 ACT SA 500

0

1966/67 1976/771979/801982/831984/851986/87 1990/911991/921993/941996/971997/982000/012002/032004/052005/062008/092010/112012/132013/14

42 Munich Re Expect the unexpected Bushfires

Accidentally caused fires Recent settlements set new records There is a need for coordination to ensure that the most effective activ­ In a human-caused bushfire, the The 2009 Black Saturday Fires also ities are targeted. Measures sug- party responsible for the fire may showed the great loss potential for gested by the Australian Business face civil and/or criminal charges, the casualty line of business. Class Round­table include more detailed based on negligence or strict liability. action lawsuits were filed against an mapping of bush and fire loads that Liability insurance comes into play if electricity distribution company and allows the determination of the risk a party caused the fire with a legal other parties. The Kilmore East Fire, level for each house, as well as the liability, but no wilful intent was which destroyed 1,242 homes and ascertainment of the most effective involved. Since a large proportion killed 119 people, was claimed to be ways of mitigating the bushfire risk. of damaging fires in Australia are caused by faults in the company’s The incentives for mitigation can be directly or indirectly attributable to power transmission system. The par- either market-based (insurance dis- human activity, and given the sub- ties agreed to settle the action and count) or mandated (legal require- stantial monetary losses, fire-fight- Victoria’s Supreme Court approved ment). ing costs and harm to people they an almost A$ 500m payout to a total cause, the risk of bushfire also needs of 5,000 plaintiffs – the largest set- In order to reduce the risk of electric­­ to be considered in connection with tlement in Australian legal history. ally caused bushfires, the Victorian casualty contracts. Government announced a A$ 750m The electricity distribution company, programme of works to take place The exposure of public utility compa- which had liability insurance that over a ten-year period in 2011. The nies is particularly high, as overhead especially provided cover for bushfire programme is focused on activities power lines are a potential ignition liability, agreed to pay A$ 378.6m. that will reduce the risk and not source and run throughout the coun- Victorian State Parties – another cause significant impact on electri­ try over long distances. Under “nor- defendant – agreed to pay A$ 103.6m city supply reliability. Part of the pro- mal conditions” a low single-digit and a maintenance contractor set- gramme is replacing bare wire power percentage figure of bushfires start tled for A$ 12.5m. The settlement lines with underground cables in the in the context of power lines. But was without admission of liability by highest bushfire risk areas. during days of extreme fire danger, the parties. The two companies and the percentage of fires caused by state parties also settled with plain- Munich Re strongly supports the electrical distribution installations tiffs for A$ 300 million in a class concept of targeted pre-loss mitiga- rises strongly above the long-term action over the Murrindindi-­ tion work for bushfire and other criti- average. This becomes evident when Marysville Fire, the electricity distri- cal natural hazards as a means of regarding the three costliest bushfire bution company paying a share of increasing resilience in communities disasters since 1980. A significant A$ 260.9 million. and saving life and property. This portion of the individual fires were was and remains one of the motivat- electricity-caused – half of the fires Disaster mitigation measures reduce ing factors behind our support for the during the Ash Wednesday disaster economic costs Australian Business Roundtable. in 1983 and one third of the fires dur- ing the Black Saturday events in In 2014, the Australian Business [email protected] 2009. Only the Canberra fires in Jan- Roundtable commissioned a case uary 2003 were all started by light- study that focused on a worst-case ning. Wind is a key variable. Adverse bushfire scenario in the Greater Mel- wind conditions, i.e. high wind bourne metropolitan area. The study speeds and change in wind direction, illustrated the economic benefit of can turn a normal fire into an uncon- mitigation. Expressed in monetary trollable inferno. High wind speeds terms, the ratio of the benefits of Exclusive online content also increase the probability of an undergrounding electricity wires rel- inferno being triggered by electrical ative to its costs projected up until The role of weather, mitigation assets. 2050 was estimated to be as high as and precaution measures: 3.1. The benefit-cost ratio of building www.munichre.com/ausnz/ more resilient houses and proper bushfire vegetation management near houses were estimated to be 1.4 and 1.3 respectively.

Munich Re Expect the unexpected 43 Volcanoes With the exception of extremely rare major meteorite impacts, no other natural events can devastate such large areas with the intensity and suddenness of volcanic eruptions. Their direct effects: lava, mudflows and pyro­ clastic flows, ash clouds and ash deposits. The indirect effect: climate Sleeping giants impact. The losses: besides the direct losses, disruption of air underneath traffic and shipping, and crop losses. Alexander Allmann Munich Re expert on volcanoes

44 Munich Re Expect the unexpected Volcanoes

Twenty-eight Holocene volcanoes Much of the North Island of New Eruptions can also lead to devastat- are located in New Zealand. They are Zealand lies within 100 km of one or ing agricultural losses. Some crops called “Holocene” because they were more Holocene volcanoes, this do not survive a layer of ash just 1 cm active in the Holocene epoch, start- includes seven airports and eight deep. In addition, major volcanic ing some 11,700 years ago. A total of ports. Also, some 5,600 km of roads eruptions can have an impact on the 326 Holocene eruptions have been and 770 km of railroads are located global climate. During a major event, documented in New Zealand, 228 of within 100 km of a volcano. While the ash clouds and volcanic gases are them occurring after 1500 AD. The proximal population of most of New often ejected into the higher atmos- largest Holocene eruption in New Zealand’s volcanoes is relatively phere, where they are distributed Zealand happened some 1,800 years small, a particular exception to this is around the globe over time. Blocking ago – with dramatic impact: the the Auckland Volcanic Field beneath portions of the sunlight, they can Taupo eruption generated a pyro­ the city of Auckland, the economic cause global temperatures to drop clastic flow that devastated an area hub of the country. This volcanic field for a couple of years. Such a tem­ of about 20,000 km2 and produced extends over 360 km2 and comprises perature drop would trigger weather pumice and ash falls over a wide 50 separate volcanic vents which are extremes and cause crop losses over expanse of the central North Island. located beneath and next to a heavily vast regions. It was the most violent volcanic erup- populated area. Even a small erup- tion the world has seen in the last tion could have a huge impact. Frequency of volcanic eruptions 5,000 years. In the course of 250,000 years, the The effects of large volcanic erup- Taupo also produced the world’s Auckland volcanoes have trans- tions are so severe that the occur- most recent VEI 8 (Volcanic Explo- formed the local landscape. The field rence probability needs to be consid- sivity Index) eruption, about 26,500 includes small cones as well as ered not only on a local basis but also years ago. VEI 8 is defined by an explosive craters. The volcanoes are globally. Unfortunately, major erup- eruption volume of more than fed by a single hotspot at a depth of tions have not been fully docu- 1,000 km3. This eruption created a 100 km. Each eruption occurred in a mented – either in historical or in caldera that is partly filled by lake new location, and it is rather unlikely geological terms. In order to be able Taupo today. The thickness of thepra that a forthcoming event will reacti- to arrive at more precise values of the (volcanic material) reached up to vate one of the existing vents. The occurrence probability in future, 200 m in the central North Island. last eruption took place 600 years Munich Re is currently supporting a Heavy ash falls went far beyond New ago and created Rangitoto Island. research project under the overall Zealand’s coasts: on the Chatman control of the Department of Earth Islands, some 1,000 km away, 18 cm The global perspective Sciences at the University of Bristol of ash was deposited. (UK). The aim is to extend the data- Worldwide, around 550 volcanoes base for major eruptions from the are classed as being active. Each current 2,000 years to 10,000 years. year, between 50 and 65 of them This work increasingly allows us to erupt. The 1980 eruption of Mount get a more dependable idea of the St. Helens in the US state of Wash- overall occurrence rate of major vol- ington demonstrated quite dramati- canic eruptions. cally the disaster potential of volca- noes. Since then, the eruptions of Despite the availability of better data Mount Pinatubo (Philippines, 1991), on overall volcano statistics and our La Soufrière (Montserrat, 1995–97) ability to warn people more reliably and Mount Tavurvur (Papua New of imminent eruptions, we still have #Volcanoes close to Guinea, 2006) also caused substan- no means of predicting when or where people and infrastruc- tial losses. During the eruption of the next VEI 8 eruption will strike. ture, limited historical Mount Eyjafjallajökull on Iceland in data, risks nobody 2010, an ash cloud rose several kilo- dares to think of. #New metres high into the atmosphere and Zealand, #Auckland, was carried towards northern and #Volcanic fields. central Europe by the prevailing winds. European airspace was closed to air traffic for safety reasons, and more than 100,000 flights were can- celled, with consequent knock-on effects for airline profits. A local eruption might thus have tremen- dous global impacts.

Munich Re Expect the unexpected 45 Volcanoes

Volcanic eruption – An insurable risk? would exceed the limits of insurability. At that time, huge areas of North America In principle, volcanic eruption is an were covered in ash. The scale of the insurable risk. Apart from a few damage is unimaginable. exceptions, however, the infrequency of loss occurrences means that the So far, the insurance industry has not technical rate is low. Any action dealt systematically with such extreme taken in response to an advance events, including those involving other warning – in other words, an evacua- natural hazards. Munich Re will therefore tion – would constitute an immense continue to support projects like the logistical challenge. In the case of the Global Volcano Model that will make it Auckland Volcanic Field, more than possible to assess such risks more 1.3 million people would be affected. ­effectively in the future.

However, volcanic eruptions can also [email protected] become global catastrophes. An https://de.linkedin.com/in/ event on the scale of the Yellowstone alexanderallmann volcano eruption 630,000 years ago

Volcanoes in New Zealand

Auckland

Exclusive online content

The effect of eruptions on the climate – simulation models: www.munichre.com/ausnz/ volcanism

Wellington

Much of the North Island of Volcanoes New Zealand lies within 100 km of one or more Holocene volca- 100 km buffer zone noes, this includes seven airports and eight ports.

Source: Munich Re

46 Munich Re Expect the unexpected Volcanoes

Munich Re Expect the unexpected 47 Economy How much can Australia’s economy withstand?

Michael Menhart Munich Re’s Chief Economist

48 Munich Re Expect the unexpected Economy

Major natural catas­ The development of the Australian put, the overall economic effect of a economy is a remarkable success natural catastrophe is not just the trophes are a burden story. It has seen inflation-adjusted, sum of direct damage to buildings, even to successful average growth of over 3% every year roads and mines. Indirect, secondary for the last 20 years. Though it did effects must also be taken into national economies like not emerge totally unscathed, Aus- account, such as ­production losses in Australia’s. The Austra­ tralia even weathered the global flooded mines or a reduction in coal financial crisis without slipping into exports. Roughly 25% of mines had lian government spends recession. to temporarily suspend operations over half a billion Aus­ altogether, another 60% suffered The country benefits from its wealth severe restrictions. The mining sec- tralian­ dollars annually of natural assets and resources, par- tor was hit hardest, with immediate on post-disaster relief ticularly in the sectors of mining, production losses of A$ 6bn. Austra­ tourism and farming. Iron ore and lian farming sustained crop losses of and recovery, but only coal make up over one third of its A$ 2bn while revenue losses in A$ 50m on pre-disaster total export volume. In fact, Australia ­tourism came to A$ 400m. is one of the world’s largest coal pro- prevention and mitiga­ ducers and exporters. However, these Major natural catastrophes take a tion. Is Australia ade­ economic strengths are also what lasting economic toll make the country so vulner­able when quately prepared for natural catastrophes occur. The situ- The immediate effects of natural potential risks of change? ation is further compounded by a catastrophes on a country’s eco- ­rising concentration of values in nomic activities can easily be Queensland and Western Australia, observed and measured, but what and growing urbanisation in the lasting impacts do ­natural catastro- coastal regions. phes have? It is often assumed that natural catas­trophes (notwithstand- Australia hit hard by 2010/2011 ing the tragic human consequences) floods can have a positive effect on an econ- omy because reconstruction acts as In late 2010 and early 2011, the an economic stimulus. Queensland floods, one of the cost­ liest natural catastrophes ever to hit Empirical studies show, however, Australia, led to direct losses of that the indirect, positive effects on A$ 6.8bn. While this is equivalent to overall prosperity do not make up for just 1% of Australia’s economic out- the indirect losses natural disasters cause. For example, “severe, devas- tating, major” natural catastrophes with over 100 fatalities and over US$ 250m (A$ 300m) in direct, inflation-adjusted losses were found to lead to a statistically significant reduction in real GDP of nearly 4% “Climate change after five years, compared to real GDP growth without the catas­trophe.

is a risk to the success The financial burden of natural catastrophes is not immediately evi- dent in economic growth rates, for story of the Australian instance because the costs of recov- ery work in the wake of a disaster are subsequently posted as income. economy” ­Nevertheless, the long-term reper- cussions should not be under­ Michael Menhart, estimated. This applies in particular Munich Re’s Chief Economist to government finances. As data from the International Monetary Fund indicate, Australia’s general government debt, at 34% of GDP, is still relatively low by international

Munich Re Expect the unexpected 49 Economy

standards, but has risen sharply The Australian government currently since the global financial crisis. The spends an estimated A$ 560m annu- debt level in 2007 was still below ally on post-disaster relief and recov- 10% of GDP. The objective of balanc- ery, but only A$ 50m on pre-disaster ing the budget has not been achieved prevention and mitigation. Public to this day, due not least to support investments in cost-efficient resilience payments made to private house- and disaster reduction meas­ures holds and businesses, as well as gov- could reduce natural catas­trophe ernment expenditure on replacement costs by more than 50% by 2050, as investment following the natural dis- estimated by the Australian Business asters of recent years. Roundtable for ­Disaster Resilience & Safer Communities in June 2013. The comparatively low public debt is a critical advantage in global compe- Australia must arm itself against tition, but it is not enough to rely changing parameters solely on prudent fiscal policy. In the case of a natural catastrophe, the Should climate change greatly state usually has little alternative but increase the frequency and/or inten- to provide generous support to the sity of events, the prevention and affected regions. A future increase in recovery costs will pose an immense the loss potential from natural hazard economic challenge. In Australia and events – resulting from a continued New Zealand, the increase in green- rise in the concentration of values and house gas concentrations over the the effects of climate change – would last 50 years has already led to a sig- place a huge strain on the national nificant rise in average temperatures. budget and jeopardise this important They are expected to rise further in competitive­ advantage. this century. The consequences could be more frequent hot extremes Australia’s economy is far from and extreme rainfall, associated with immune the flood risk in many locations.

Australia has a stable, dynamic econ- Precisely because of the country’s omy, a tried-and-tested natural disas- impressive economic success story, ter management system and a well- Australia must arm itself against the funded insurance industry. The changing parameters. Research country is therefore better equipped shows that countries with higher to cope with natural disasters than insurance penetration suffer less less developed nations. Nevertheless, from the economic impact of natural events like the Queensland floods catastrophes. Insurance has an show that Australia is far from essential role to play in mitigating immune. This is true now more than these adverse effects. ever, for although the growth outlook for the Australian economy is still [email protected] positive, things are not looking quite as rosy as in past years, when the Australian economy was boosted considerably by the mining boom and the tremendous dynamism of the Chinese economy.

Accordingly, it will become more ­difficult for the Australian govern- ment and for private households to cushion the consequences of natural disasters. The coffers will not be quite so full.

Hardly a year goes by in which Aus- tralia is not hit by a relatively severe natural catastrophe, not to mention frequent minor to moderate events.

50 Munich Re Expect the unexpected Contacts

Scott Hawkins Scott Reeves General Manager, Non-Life Underwriting Manager Australasia Sydney Sydney

[email protected] [email protected] https://au.linkedin.com/in/ https://au.linkedin.com/in/ scotthawkins1 scottreeves2

Cameron Hick Heinrich Eder Client Manager Managing Director Sydney Sydney

[email protected] [email protected] https://au.linkedin.com/in/ https://au.linkedin.com/in/ cameronhick heinricheder/de

Jim Parkes Diane Dunbar Client Manager Claims Manager Sydney Sydney

[email protected] [email protected] https://au.linkedin.com/in/ dianedunbar1/de

John McWilliams Martin Kreft Manager Non-Life Claims Regional Manager Sydney Auckland

[email protected] [email protected] https://au.linkedin.com/in/ johnmcwilliams2/de

Sydney office address: 143 Macquarie Street Sydney NSW 2000 AUSTRALIA

Melbourne office address: Level 36 140 William Street Melbourne 3000 AUSTRALIA

Auckland office address: PWC Tower, Level 15 188 Quay Street Auckland 1010 NEW ZEALAND

Munich Re Expect the unexpected 51 © 2015 Sources (page 27) Münchener Rückversicherungs-Gesellschaft Allen, J.T., and D.J. Karoly, 2013: A climatology of Königinstrasse 107 Australian severe thunderstorm environments 80802 München 1979–2011: inter-annual variability and ENSO Germany influence. Int. J. Climatol., DOI: 10.1002/joc.3667. Tel.: +49 89 38 91-0 Fax: +49 89 39 90 56 Australian Government, Bureau of Meteorology, www.munichre.com 2015: http://www.bom.gov.au/climate/enso/, http://www.bom.gov.au/climate/ Münchener Rückversicherungs-Gesellschaft enso/#tabs=Indian-Ocean. (Munich Reinsurance Company) is a reinsur- ance company organised under the laws of CSIRO and Bureau of Meteorology, 2015: Cli- ­Germany. In some countries, including in the mate Change in Australia. Information for Aus- United States, Munich Reinsurance Company tralia’s Natural Resource Management Regions: holds the status of an unauthorised reinsurer. Technical Report, CSIRO and Bureau of Mete- Policies are underwritten by Munich Reinsur- orology, Australia, 216 pages. ance Company or its affiliated insurance and reinsurance subsidiaries. Certain coverages are National Institute of Water and Atmospheric not available in all jurisdictions. Research (NIWA), New Zealand, https://www. niwa.co.nz/our-science/climate/information- Any description in this document is for general and-resources/clivar/elnino. information purposes only and does not consti- tute an offer to sell or a solicitation of an offer to Ummenhofer, C.C., et al., 2009: What causes buy any product. southeast Australia’s worst droughts? Geophysical Research Letters, 36, doi:10.1029/2008GL036801. Printed by Kastner & Callwey Ummenhofer, C.C., et al., 2011: Indian and Pacific Jahnstrasse 5 Ocean influences on southeast ­Australian 85661 Forstinning drought and soil moisture. Journal of Climate, Germany 24, 1313-1336.

Picture credits Cover: Rob Henderson/Getty Images p. 1: Illustration Christoph Hoppenbrock pp. 2, 51: first and fourth: Jens Bruchhaus pp. 6, 48: shutterstock pp. 6, 12, 13, 14, 24, 28, 32, 34, 40, 48: Thomas Straub p. 10: Andrew Bain/Getty Images p. 12: Daniel Kafalas/EyeEm/Getty Images p. 14: Wikipedia p. 15 top: Ray Saunders/Newspix/action press p. 15 bottom: Bild fehlt noch p. 18 top: David Gray/Reuters/Corbis p. 18 bottom: Eberhard Faust pp. 20/21: dpa Picture-Alliance/Dave Hunt p. 21 from top to bottom: Ladislav Pavliha/ Getty Images; Sarah-Jane Allen/Demotix/ Corbis; Jim Edds/Getty Images p. 24: Chris Clor/Blend Images RM/ Getty Images p. 28: Barbara Gauntt/ZUMA Press/Corbis p. 31: Tim Wimborne/Reuters/Corbis p. 32: picture alliance/dpa p. 34: picture alliance/blickwinkel/dpa p. 38: Getty Images/Science Faction p. 40: Douglas Peebles/Corbis p. 41: Gary Pearl/Getty Images p. 44: Antony Dickson/AFP/Getty Images p. 47: De Agostini/Getty Images p. 51: second, third, fifth, seventh and eighth: Huw Lambert

Order number 302-08732

52 Munich Re Expect the unexpected

Expect the unexpected Scientific facts and economic impacts of natural disasters impacts economic Scientific and facts

Munich Re

NOT IF, BUT HOW