How Munich Re Assesses Risk
By Carol Matlack Carol Matlack – 1 hr 31 mins ago
Last Apr. 14, Iceland's Eyjafjallajokull volcano erupted. Five days later, Nissan Motor shut down three auto assembly lines in Japan. The factories had run out of tire-pressure sensors when a plane carrying a shipment from a supplier in Ireland was grounded because of volcanic ash. At a BMW plant in Spartanburg, S.C., work slowed after transmissions couldn't be delivered from Germany.
What was the probability of that happening? That's the kind of question Munich Re must grapple with. Munich Re is the world's biggest reinsurer, one of a handful of industry giants including Swiss Re and Berkshire Hathaway's Gen Re that sell policies to insurance companies to cover the risks they absorb from policyholders. That gives the 130-year-old company an unparalleled view of just about everything that could go wrong in the world. And in a global economy, figuring out where and why those things might happen is getting a lot more complicated. "The most significant changes in risk management have taken place in the past 7 to 10 years," says Joachim Oechslin, Munich Re's chief risk officer. "Today it's not only about data gathering" -- using geological records, say, to predict the likelihood of a volcanic eruption -- "but trying to figure out the relationship of things," such as how an event like the Iceland volcano can ripple through a supply chain. While Munich Re specialists are studying the eruption, they say they still lack the tools to accurately predict the chain of damages unleashed by such a disaster.
Inside its neo-Baroque headquarters overlooking the tree-lined walkways of Munich's English Garden, Munich Re specialists pore over data to help them calculate the likelihood of a dizzying array of mishaps. They know the probability that Los Angeles will suffer a major earthquake in the next three decades (it's 97 percent) and the odds that a 60-year-old American man will die from a heart attack by age 70 (3.2 percent if he doesn't smoke, and 8.4 percent if he does). They search for patterns in data from past accidents, learning, for instance, that boats are most likely to spring leaks during the early months of an economic upswing. The reason: During downturns, vessels are often placed in dry-dock, where wood shrinks as its dries, leaving gaps where water can enter when the boat returns to service.
Increasingly, Munich Re is focusing on what it calls emerging risks: subtle, often seemingly innocuous trends that could carry the seeds of disaster -- everything from rising prices at art auctions (which can increase theft) to the widespread installation of rooftop photovoltaic panels (a fire risk).
Who knew that bundled subprime mortgages would lead to a near collapse of the global financial system? Munich Re had a pretty good inkling. In 2007 its analysts concluded that collateralized debt obligations were far riskier than was generally realized. The company wrote new policies for clients in finance, setting tighter limits on its potential exposure to losses from such instruments, and came through the crisis in strong shape. In 2009, its profit rose 53 percent, to $3.5 billion, on revenue from premiums of $55.1 billion.
Munich Re learned the hard way about the need for more sophisticated risk controls. A decade ago, it had invested about 20 percent of its capital in equities. "We had the profile of a hedge fund rather than an insurance company," Oechslin says. After markets worldwide tanked in 2002, the company booked an unprecedented $492 million loss for 2003. Since then, Munich Re has greatly diversified its investments, with less than 3 percent in equities. "They have their house in much better order than they did five or six years ago," says Paul Walther, chief executive officer of Reinsurance Directions, a Florida consulting firm.
One of the new risks Munich Re is tracking is climate change. The company has the world's most comprehensive database on natural disasters, with information going back centuries. It shows that the frequency of serious floods worldwide has more than tripled since 1980, while hurricanes and other severe windstorms have doubled. "Global warming is real, and it affects our business," says Peter Hoppe, who heads the company's climate-change research. Munich Re has become a leading advocate for renewable-energy development, even joining a venture that plans to generate solar power in the Sahara and ship it under the Mediterranean to Europe.
Other Munich Re specialists try to understand human risk-taking behavior. Rainer Sachs, who heads the company's emerging risks research unit, spends his days pondering such head-scratchers as the fact that, while traffic deaths have dropped sharply in recent years, the rate of serious injuries from accidents has not. His conclusion, buttressed by studies of driver behavior in several countries: With airbags and other safety features, drivers take more risks because they believe their cars are safer. "Everyone has his own risk thermostat," he says. "We introduce risk-mitigation devices that are supposed to make life safer -- and then we change our behavior to make life more interesting."
Those insights could help Munich Re develop computer models to predict the likelihood of accidents in a wide range of settings, including financial markets. Sachs contends that a similar thermostat effect figured in the global crisis. "When people invested in subprime products, they bought hedging products, so they felt safe," he says.
Other human behaviors defy prediction. Terrorism, for one. While insurers can draw conclusions by studying the actions of groups of people, "You cannot model the decision-making of small numbers of individuals," says Heike Trilovszky, Munich Re's corporate underwriting chief. "We're convinced that terrorism is not insurable."
The bottom line: As the global economy gets more connected, it has become harder for insurers like Munich Re to determine risk.
[bolded a couple bits for emphasis-RG]
http://news.yahoo.com/s/bw/20101203/...a2010121766041
(businessweek article at yahoo)
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Munich Re is not what most people would call "feckless hand waving alarmists". Reinsurers such as Munich Re have a huge stake in measuring risk, and seem to have concluded there is something to the warming thing, based on the data they have.
Last edited by RandomGuy; 10-31-2011 at 12:19 PM.
I've read a few places where American companies are also trying to see how the inevitable global warming will affect their business. iow, for them, global warming is real and worsening. Since global warming isn't a "let's cook the books for this quarter's closing" project, companies taking GW seriously is significant.
These stupid companies really need to do their homework and discover that global warming is a conspiracy, a fraud by 1000s of scientists around the world for decades.
It's so real that temps are flat-lined for over a decade.
Keep championing the cause.
Using flooding and hurricane (especially hurricane) figures since 1980 is not a good way to asses global warming. The Atlantic multidecadal oscillation has more to do with hurricane numbers than global warming. I don't know how windstorms factor into this so thats interesting though.
They flat lined?
You start and run a multi-billion dollar insurance company based on your beliefs.
Go ahead, I'll wait.
We can see if it is still around in 20 years.
Until then, I am inclined to give some credence to the people whose job it is, quite literally, to gather and analyse global climate data.
Is it your job to do that?
You Lie
2010 is the hottest year on record, terminating the hottest decade on record.
I don't know what's worse, boutons 'you lie' comments or the 400 climate/globalwarming/cooling threads.
They flat lined?
Scary
I'll have to mark this on my calendar. I agree with you.
Why do you insult actuarial science in this way?
So by dodging the question we can assume your answer is, "No, it is not my job to gather and analyse data on global warming".You start and run a multi-billion dollar insurance company based on your beliefs.
Go ahead, I'll wait.
We can see if it is still around in 20 years.
Until then, I am inclined to give some credence to the people whose job it is, quite literally, to gather and analyse global climate data.
Is it your job to do that?
Thank you.
Thats a flat line?
No, actually. That smiley-boy thinks it is, is kind of obvious.
I would have to run a regression line on it (the red "temperature anomoly"), but it appears to move upwards to the right.
I'm sure that someone has, and we could play Dueling Graphs for a while, heh.
So when you say that you have never said that the climate isn't warming, this post was you putting forth an argument that you dont' believe?
And when you post a graph that says:
"global temperature isn't rising"
without commenting that it isn't what you believe, we're supposed to buy your claim of always believing the earth is warming a year later when solid scientific analysis shows that it most definitely is?
Nice find, RG. Darrin you are a Sophist piece of that cannot even keep up with the bull you are fed. Its sad and disgusting. No wonder you had to learn how to write in C and java to get a job. No one ever would want you as an analyst.
The US military is testing non-oil fuels, and facing up to global warming catastrophes such a destabilized govts, extreme weather, as well as oil becoming too expensive even for the gold-plated, sacred military budgets.
The military worries less about cost and more about having to defend its supply lines against enemy actions.
A fuel truck with 50,000 gallons of fuel is a very tempting target for the jackwagons with their fingers on the triggers of IED/RPGs.
Given how much fuel modern armored vehicles suck up there are a lot of such vehicles running around, and a lot of them getting ambushed.
Oddly enough, the women receiving medals for bravery under enemy fire tend to be in the nominally non-combat roles of logistics. Reading some of these accounts convinces me of how silly it is to be keeping women out of combat units.
"The way to procure insults is to submit to them: a man meets with no more respect than he exacts."
Lol Darrin is RG's .
LOL! I bet you don't even see the irony in you posting this, do you? Here's a hint: be introspective with it.
Lol soooooooooooo good.
I shovelled snow THIS WEEKEND!
OCTOBER!!!
I've said before; Warmer = GOOD!
Some of you really suck at reading graphs.
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