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.