13 February 2011

Tall Tales in the New York Times

I've made peace with the fact that many people want to believe things utterly unsupported by data, such as what Elisabeth Rosenthal writes in today's New York Times, that intense storms and floods have become three times more common and increasing damage from such events is evidence of human caused climate change. Of course, people believe a lot of silly things that data don't support -- like President Obama is a Muslim with a fake birth certificate, vaccines cause autism, and climate change is a hoax, just to name a few on a very long list. While such misplaced beliefs are always disconcerting, especially so to academics who actually study these issues, such misjudgments need not necessarily stand in the way of effective action.  So it is not worth getting too worked up about tall tales.

But even so, it is still amazing to see the newspaper of record publish a statement like the following about Munich Re, one of the world's largest reinsurance companies:
Munich Re is already tailoring its offerings to a world of more extreme weather. It is a matter of financial survival: In 2008, heavy snows in China resulted in the collapse of 223,000 homes, according to Chinese government statistics, including $1 billion in insured losses
Munich Re's financial survival? Here Rosenthal makes a leap well beyond the perhaps understandable following along with the delusions of crowds. There are always risks to bringing data to bear on an enjoyable tale tall, but let's look anyway at what is actually going on in Munich Re's business over the past several years.

Here is what Muinch Re reported on its 2008 company performance, the year in which China suffered the heavy snows:
Notwithstanding the most severe financial crisis for generations, Munich Re recorded a clear profit for the financial year 2008, in line with previous announcements. According to preliminary calculations, the consolidated profit amounted to €1.5bn.
How about 2009 then?
Nikolaus von Bomhard, Chairman of the Board of Management: “We have brought the financial year 2009 to a successful close: with a profit of over €2.5bn, we were even able to surpass expectations and achieve our long-term return target despite the difficult environment.”
Sure, 2010 must have see some evidence of a threat to the company's financial survival?  Guess again:
On the basis of preliminary estimates, Munich Re achieved a consolidated result of €2.43bn for 2010 (previous year: €2.56bn), despite substantial major losses. The profit for the fourth quarter totalled €0.48bn (0.78bn). Shareholders are to participate in last year's success through another increase in the dividend: subject to approval by the Supervisory Board and the Annual General Meeting, the dividend will rise by 50 cents to €6.25 (5.75) per share. In addition, Munich Re has announced a further share buy-back programme: shares with a volume of up to €500m are to be repurchased before the Annual General Meeting in 2012
The NYT may be unaware of the fact that not only is Munich Re in the catastrophe reinsurance business, meaning that it pays out variable and large claims for disasters, but that its business actually depends upon those disasters -- Munich Re explains in the context of recent disasters (emphasis added):
Overall, pressure on prices in most lines of business and regions is persisting. Munich Re therefore consistently withdrew from under-rated business. It nevertheless proved possible to expand accounts with individual major clients, so that the business volume grew slightly on balance, despite the difficult environment. Munich Re owes this profitable growth especially to its ability to swiftly offer complex, tailor-made reinsurance solutions to its clients. Besides this, the many large losses resulting from natural hazards and also from man-made events, had a stabilising influence on the lines of business and regions affected. Thus, prices increased markedly for natural catastrophe covers in Australia/New Zealand (Oceania) and in offshore energy business. There were no major changes in conditions in this renewal season. The overall outcome of the reinsurance treaty renewals at 1 January 2011 was again very satisfactory for Munich Re.
Here is how to interpret these remarks -- There is downward pressure on prices in the reinsurance industry because there have not been enough disasters to keep up demand and thus premium prices. The following observation was made just three months ago:
Insurance and reinsurance prices have been falling across most business lines for two years, reflecting intense competition between well-capitalised insurers and a comparative dearth of major catastrophe-induced losses.
But, as Munch Re explains, they have been able to overcome the dearth of disasters because recent extreme events have allowed them to increase prices on coverage in a manner that not only counteracts recent losses to some degree, but even allows for "profitable growth."  As with most tall tales, the one about the financial plight of reinsurers dealing with a changed climate isn't going away any time soon. It is just another bit of  popular unreality that effective decision making will have to overcome.

8 comments:

  1. China: 223,000 homes and $1 billion in insured losses. That's about $4484 per home, which means that many of these homes were obviously not insured.

    Tropical Cyclone Bingiza is making landfall in NE Madagascar as a Category 3 at 100 knots, but the damage is likely to be small for infrastructure, but large to agriculture. It is unlikely that the inhabitants that subsist on that ag would have the means to purchase insurance anyways, since the costs would be astronomical.

    The lack of Typhoon and Hurricane landfalls is simply a symptom of the overall lack of tropical cyclone activity globally -- still at historical lows.

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  2. I don't think the article is that bad, it's a simple piece. Munich Re are the 'rent-a-quote' of choice in these matters and somewhat naturally encourage people to purchase catastrophe reinsurance since that is what they sell.

    That insurers charge lower premiums for better built property not on a flood plain is hardly breaking news, indicating to me (I have no idea who Elisabeth Rosenthal is) that the journalist is hardly a heavy hitter? That a water engineer argues for more money being spent on water engineering leaves me somewhat unmoved!

    If she'd said 'financial prudence' instead of 'financial survival' the piece is unexceptional, even dull?

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  3. Munich Re is in effect using the hype of catastrophic climate change to shake down willingly duped customers.
    Unfortunately the consumers who are many steps removed from the decisions making that leads to this sort of over pricing of risk have little or no influence on this.
    Reinsurance is in the short and medium term very well insulated from consumer demand.
    Munich Re is just a profiteer seeking to hide out behind nice quotes for the use of propagandisttic AGW promoters like Rosenthal.
    As to the 'paper of record', I think the history shows that the NYT has managed to be on the wrong side of nearly every issue for a long time now.

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  4. #1
    That's about $4484 per home

    What the value of a tin shack?

    With notable exceptions, people with the money to build 'nice' homes tend to build them outside of floodplains.

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  5. Unfortunately I'm on the front lines here. Tampa, Florida.

    Reinsurance companies decided to stop using historical data to predict hurricane frequency and intensity, and use computer modelling instead. Predictably their models suggest a much higher risk than historical data would suggest.

    Result has been an increase in rates of ~40% over the last 5 years with hardly any landfalls in Florida at all.

    The reinsurance industry's computer models are proprietary they claim, so details of how they work has been tightly guarded (hidden).

    To make it even better for a Florida consumer, many state regulated property insurers have left the state because they can't make profits, and they blame the reinsurance industry for their high rates. The reinsurance industry is not regulated.

    Consumers are cornered. You must have property insurance if you have a mortgage.

    My suggestion? Invest in reinsurance companies. Don't move to Florida.

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  6. #4

    Except that we are talking about China where you build your house where the Government tells you, flood plain or no flood plain.

    Then again who cares if it gets knocked down, the Chinese have extra cities and homes just sitting waiting to be populated.

    "The ghost towns of China: Amazing satellite images show cities meant to be home to millions lying deserted

    Some estimates put the number of empty homes at as many as 64 million, with up to 20 new cities being built every year in the country's vast swathes of free land."
    http://www.dailymail.co.uk/news/article-1339536/Ghost-towns-China-Satellite-images-cities-lying-completely-deserted.html

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  7. Roger,

    An infinite number of bonus points for the Ray Wylie Hubbard reference.

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  8. "....climate change is a hoax, just to name a few on a very long list."

    The number of people that think the climate will never change, or has never changed, or is not changing now must be vanishingly small. On the other hand those that believe CAGW is overhyped and unproven is much larger.

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