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<\/a><\/p>\nMunich Re is one of the top 2 global reinsurance companies in the world, with revenues of \u20ac27.8 billion in 2016[i]<\/a>. The profits of reinsurance companies arise from the difference between the premiums they earn and the claims they must pay. One of the reasons why insurers look for the services of Munich Re is to share the risk associated to the protection of property and lives against the damage caused by natural catastrophes. In fact, nowadays global reinsurance companies pay the larger share for catastrophic claims[ii]<\/a>, which makes them a critical step in the supply chain of insurance against natural catastrophes. Without reinsurers, insurance against natural catastrophes is not possible. Munich Re has helped to pay for the damages of the 1906 San Francisco earthquake and fire[iii]<\/a> and of Hurricane Hugo in 1989[iv]<\/a>.<\/p>\n The ability to accurately price risk is a core capability for every reinsurance company. In fact, the ability of estimating and pricing risk of natural catastrophes is what enables Munich RE to offer its services at a price at which they can profit but is still make the investment worth for their customer \u2013 the primary insurer.<\/p>\n Since 1980, the frequency of weather-related catastrophes has increased three-fold.[v]<\/a> [vi]\u00a0<\/a>.<\/p>\n If the frequency of natural disasters keeps increasing at a predictable pace, Munich Re will increase its price in order to compensate for the higher risks.<\/p>\n <\/p>\n If that happens, presumably there will come a point when prices will be so high that revenues of Munich Re will start to decrease because less costumers will be able to afford coverage or will have interest to do so, but reinsurance, and hence insurance, would still be supplied.<\/p>\n However, the situation could be much worse if natural catastrophes start to increase in an unpredictable pattern. The consequence of inaccurately pricing the risk of natural disasters is that the company could have unexpected losses as the revenue received from the premiums in exchange for coverage are not enough to off-set the expenses with claims from end customers. One might argue that this unpredictable trend has already began: \u00a0in the period between 2012 and 2015, Munich Re (reinsurance division) spent \u20ac686 million a year to help recover properties damages by natural catastrophes[vii]<\/a>, but in the third quarter of 2016, RE Munich announced to shareholders that it would decrease its results outlook for the year by due to higher than expected losses caused by hurricanes Harvey, Irma and Maria.[viii]<\/a> Comparable expenses in 2016 were \u20ac929 million.<\/p>\n To cope with the additional risk brought by climate change, Munich Re has established a research institution called Corporate Climate Center (CCI)\u00a0that has been studying climate change and its consequences since 1974. Researchers of CCI have reported that Munich Re will be capable of confidently estimating the likelihood of natural catastrophes until 2050, but if measures are not taken to reduce the emission of CO2, the risk of natural disasters will become impossible to predict and assets will become uninsurable.[ix]<\/a> In fact, the difference between the costs of natural disasters and the amount insured \u2013 the so-called \u201cprotection gap\u201d – \u00a0has gone from 63% in 2012 to 72% in 2016.[x]<\/a><\/p>\n Munich Re is arguably the best positioned institutions in the world to predict natural disasters. They have the best data and the right incentives and resources to do so. As such, they should take a more active role in influencing governments and regulations to incentivize more drastic measure to reduce the carbon emissions.<\/p>\n What other actions should Munich Re take to reduce the protection gap and ensure the supply and profitability of natural catastrophes insurance in future decades.<\/p>\n (792 words)<\/p>\n [i]<\/a> Munich RE, 2016 Preliminary Financial Statements, [https:\/\/www.munichre.com\/site\/corporate\/get\/params_E1386298429_Dattachment\/1373399\/MunichRe-IR-Preliminary-financial-statements-2016.pdf], accessed November 2017<\/p>\n [ii]<\/a> McKinsey & Company, \u201cGlobal reinsurance: Fit for the future\u201d, September 2017 [https:\/\/www.mckinsey.com\/industries\/financial-services\/our-insights\/global-reinsurance-fit-for-the-future]<\/p>\n [iii]<\/a> Munich RE, \u201cGroup History\u201d https:\/\/www.munichre.com\/en\/group\/company\/history\/early-years\/index.html<\/a>, accessed November 2017<\/p>\n [iv]<\/a> Munich RE, \u201cGroup History\u201d https:\/\/www.munichre.com\/en\/group\/company\/history\/new-era\/index.html<\/a>, accessed November 2017<\/p>\n [v]<\/a> University of Cambridge, \u201cCambridge Institute for Sustainability Leadership – ClimateWise launches two reports that warn of growing protection gap due to rising impact of climate risks\u201d https:\/\/www.cisl.cam.ac.uk\/business-action\/sustainable-finance\/climatewise\/news\/insurance-leaders-warn-protection-gap-due-to-impact-climate-risks<\/a>,\u00a0 accessed November 2017<\/p>\n [vi]<\/a> Munich Re, \u201cNat Cat Database\u201d http:\/\/natcatservice.munichre.com\/events\/1?filter=eyJ5ZWFyRnJvbSI6MTk4MCwieWVhclRvIjoyMDE2fQ%3D%3D&type=1<\/a> accessed November 2017<\/p>\n [vii]<\/a> Munich RE, \u201cKey Figures\u201d https:\/\/www.munichre.com\/en\/ir\/annual-report-2016\/key-figures\/index.html<\/a><\/p>\n accessed November 2017<\/p>\n [viii]<\/a> Munich RE, \u201cPress Release\u201d https:\/\/www.munichre.com\/en\/media-relations\/publications\/press-releases\/2017\/2017-10-26-press-release\/index.html<\/a> accessed November 2017<\/p>\n [ix]<\/a> New Republic https:\/\/newrepublic.com\/article\/123212\/who-will-pay-climate-change<\/a> accessed November 2017<\/p>\n [x]<\/a> Munich Re, \u201cNat Cat Database\u201d http:\/\/natcatservice.munichre.com\/events\/1?filter=eyJ5ZWFyRnJvbSI6MTk4MCwieWVhclRvIjoyMDE2fQ%3D%3D&type=1<\/a> accessed November 2017<\/p>\n","protected":false},"excerpt":{"rendered":" How to cope with unpredictability caused by climate change?<\/p>\n","protected":false},"author":10218,"featured_media":26175,"comment_status":"open","ping_status":"closed","template":"","categories":[1218,730,3517,1694,1723],"class_list":["post-22646","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-climate-change","category-insurance","category-natural-catastrophes","category-natural-disasters","category-reinsurance","hck-taxonomy-organization-munich-re","hck-taxonomy-industry-insurance","hck-taxonomy-country-germany"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2017\/","yoast_head":"\n<\/p>\n