For insurers, vulnerability can be viewed broadly in terms of the sector's capacity to pay for extreme events, together with the temporal sequence of such events. The key to vulnerability is the probable maximum loss (PML), which is the best estimate of the cost that is likely to emanate from an event with a specified probability of occurrence. In recent times, PMLs often have been revised upward significantly. The European winter storms Lothar and Martin of 1999 (US$8.4 billion insured losses) caught European insurers and reinsurers offguard, presenting losses that substantially exceeded prevailing expectations. These storms constituted the most serious natural disaster ever covered by insurance in France, with about 3 million claims (FFSA, 2000). One recent estimate for the United States was a combined PML of US$155 billion for 1-in-100-year (i.e., 1% yr-1 likelihood) for all types of natural disasters nationally (see Figure 15-8).
Unnewehr (1999) segmented the market and estimated that 17% of 1997 U.S. P/C insurance premiums were associated with "significant" exposure to weather-related loss. The paper did not explore other measures or sources of vulnerability and exposure, such as total insured property values at risk (US$4 trillion in insured property in the Gulf and Atlantic coastal counties of the United States) (Hooke, 2000), or the extent of insolvency risk. These results are not transferable to other regions, where insurance systems and natural hazards can be very unlike those in the United States (see Figure 8-6).
The particular role of weather in vehicle-related losses is not well studied. Vehicle insurance represents 48% of U.S. P/C premiums; it is ranked in the aforementioned study as having "minor" weather sensitivity. Of total vehicle-related accidents, 16% of those in the United States are caused by adverse weather conditions (NHTSA, 1999); 33% of those in Canada are weather related (White and Etkin, 1997). Physical damage to vehicles during U.S. natural catastrophes between 1996 and mid-2000 represented an additional $3.4 billion (10%) of total insured property losses, ranging as high as 55% for individual events (PCS, 2000; Mills et al., 2001).
Although aggregate industry assessments are useful, analyses of vulnerability clearly must take into account the complexity and specialized structure of the insurance sector (GAO, 2000a). Although an aggregate U.S. insurance surplus of US$200-350 billion often is cited (Doherty, 1997; GAO, 2000a), roughly 80% of this surplus is required for non-weather-sensitive branches (e.g., workers' compensation), assuming proportionality with premium-based risk figures quoted by Unnewehr (1999). In addition, insurers are independent and have radically different mixes of risks, so individual firms may become insolvent long before losses approach the industry's aggregate capacity (Doherty, 1997; Klein, 1997). Single-state PML events at the 1% likelihood level would result in economic stress ranging from 5 to 60% of insurers by market share (Pullen, 1999b). Moreover, catastrophes can disrupt insurance markets and harm insurance companies and consumers even in cases in which all claims are paid (GAO, 2000a; Ryland, 2000).
Reinsurance adequacy is another issue in vulnerability assessment. Swiss Re (1997) concluded that the availability of reinsurance coverage for natural disasters in 14 major markets was insufficient and that following a major event, primary insurers' (the customers of reinsurers) equity base (surplus) would come under considerable strain. For PML windstorm events in Australia, Japan, and the United States, the impact on aggregate surplus would be reductions of 24, 41, and 11%, respectively (Swiss Re, 1997). Solvency analyses typically give only "partial credit" to primary insurers for reinsurance (e.g., 50% in the European Union) because of the uncertain viability of reinsurance contracts or reinsurers themselves following catastrophic losses (Doherty et al., 1992; Swiss Re, 2000a).
Aside from issues of solvency, past extreme weather events clearly have measurable short- to medium-term impacts on insurance and reinsurance profitabilityeven at a national scale (Figure 8-4a) and on the availability of insurance following the event (Davidson 1996; Pullen, 1999b). Catastrophe losses during 1999 and 2000 contributed to marked short-term depressions in earnings and stock prices for several large insurers and reinsurers (Edgecliffe-Johnson, 1999; Carpenter, 2000; Lonkevich, 2000). This development can restrict insurers' ability to raise new capital for expansion or even to continue the operations of highly exposed branches.
The overarching insurance business environment also is a key factor in determining vulnerability. Cyclical pressures or incidental broad-based stresses on the industrysuch as major tobacco litigation (Bradford, 2000; Clow, 2000; Hofmann, 2000a), the crisis in environmental liability insurance (U.S. Superfund, asbestos, and lead paint claims), the Asian financial crisis, or increased competition from Internet sales (Ceniceros, 2000)could place considerable demands on surplus (Mooney, 1999; GAO, 2000a; Swiss Re, 1998b, 2000a). Developments in financial markets can influence the level and availability of insurance surplus (Cummins et al., 1999; GAO, 2000b; Swiss Re, 2000a). More than three-quarters of the growth in the U.S. insurance industry's surplus since 1995 resulted from capital gains (GAO, 2000a).
On one hand, the trend toward convergence between banking and insurance potentially increases diversification and robustness. On the other hand, it exposes one sector to risks faced in the other, and, in some cases, geographical diversification of a company's insurance business has moved it into the path of increased disaster losses (Berry, 2000; Greenwald, 2000; Howard, 2000b; Lonkevich, 2000). Weather-related vulnerability could increase if insurers participate in emerging capital market alternatives for risk financing (Marcon, 1999). In general, such convergence is more likely for the life insurance segment
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