ReinsuranceShort-term

Renewable Energy

COVER interviewed Dr Ludger Arnoldussen, Member of the Board of Management, Munich Re, on his presentation to the AIO Conference in Zimbabwe in May.

COVER: Is there serious focus on renewable energy globally and has big business bought in yet?

Dr Arnoldussen: Renewable energies are globally gaining in significance. To give just one example: in line with political targets, the share of renewable energies in power generation in Germany is expected to increase from a current 10% to 60% by the middle of the century. This will also create opportunities for the German insurance industry. In 2009, premium income from the insurance of renewable energy facilities totalled approximately €186m in Germany. For 2020, Munich Re expects premium volume to reach around €440m. At the same time, business potential should rise from €19m to around €50m owing to the construction of new facilities.

COVER: What opportunities exist in this sector for the insurer? Is this in both the developed and developing countries?

Dr Arnoldussen: On the one hand, for the insurance industry, climate change represents a so-called risk of change which is highly likely to affect exposure and claims over the coming decades. These effects can be greater or lesser, depending on the specific risk and region. As data improve, the impact of climate change will in the long term be factored into our loss models and thus into our premium calculations, as an insurance premium always reflects the risk.

But, on the other hand, Munich Re thinks climate change also offers new opportunities for insurers and reinsurers – both in developed and developing countries. With a view to climate change, Munich Re has developed a number of new covers that reduce risks especially for investors in renewable energies and thus help to make such investments at all possible. For example, the first performance warranty cover for photovoltaic modules provides operators and investors with greater planning certainty. This policy guarantees that modules will perform to at least 90% of their rated capacity over the first ten years and to at least 80% over the subsequent 15 years. Munich Re also offers cover concepts for the construction and operation of offshore wind farms. Munich Re is the market leader for covers designed to protect projects in the renewable energies sphere, for example, when projects suffer setbacks or damage as a result of technical errors or natural catastrophes in any phase (design, construction, transport or operation). Also, our extensive expertise in catastrophe bonds (‘cat bonds’) allows our clients to transfer their natural catastrophe risks to the capital market. Munich Re is also investing substantially in a diversified portfolio of renewable energies and in 2009 initiated, together with the Desertec Foundation, the world’s largest renewable energy project to date, which has the goal of producing electricity in the deserts of northern Africa to supply power both for local markets and for Europe.

These opportunities for new products and investments show that, from an insurance perspective, climate change is no cause for panic. While we expect significant effects on losses over the coming decades, the consequences of climate change will emerge gradually, so that we consider climate change to be a well calculable risk, which, as the underlying data improve, will increasingly be taken into account in loss models and ultimately in premiums. Climate change and climate-protection measures also call for innovative solutions from the insurance industry in entirely new fields of business.

Global Warming

COVER: There seem to be growing voices denying the effects of global warming, or down-playing the cause and effect. Are we winning the battle for support from the major economies in the world?

Dr Arnoldussen: There is no doubt: climate change is a fact, and it is almost entirely made by man. The increased concentration of greenhouse gas in the earth’s atmosphere has caused global mean annual temperatures to increase by 0,74°C just in the last 100 years. 2010 was the warmest year since records began 130 years ago. The ten warmest years during this period all lie within the last 13 years. The effect of a warmer atmosphere and higher sea temperature is significant. The sea level rises and the weather machine moves up a gear. Weather extremes are expected to increase in many regions.

Even highly ambitious schemes cannot halt climate change, but it still can and must be limited so that we do not reach any climate-change tipping points. The long-term goal of limiting global warming to 2°C over pre-industrial levels was set out in the Copenhagen Accord agreed in December 2009. Global temperature has already risen by almost 0,8°C in relation to pre-industrial levels. Even if all emissions were to cease immediately, further warming would be unavoidable due to the climate system’s inertia and the fact that carbon dioxide remains in the atmosphere for a very long time (over 100 years). For the upper limit of 2℃ to be achieved with a probability of more than 50%, global emissions would have to be at least halved over 1990 levels by 2050. In addition, the turnaround in globally rising emissions would have to come well before 2020. With the current voluntary and non-verifiable emission reduction targets for the over 120 countries supporting the Copenhagen Accord to date global temperature will increase by more than 3°C.

COVER: The past year has indicated an increase in severity and frequency of weather-related disasters, especially flooding. What is your response to those authorities who offer the opinion that global warming is a cyclical phenomenon that comes and goes, and that there is no long-term danger from the current trend?

Dr Arnoldussen: Munich Re has been analysing natural hazards and natural hazard losses for more than 35 years. For this purpose, Munich Re has set up the most comprehensive natural catastrophe database in the world, which currently comprises more than 28,000 events.

According to our Natcat database, globally the number of weather-related natural catastrophes with relevance to claims has more than doubled since 1980, whilst the number of geophysical events has by and large remained constant (factor of 1,4). Let’s have a look at losses from weather-related natural catastrophes in the period 1980 – 2009, taking inflation into account: the overall losses rose by a factor of 3, whilst insured losses from such events increased by a factor of around 4 during the same period.

These trends are attributable primarily to socio-economic effects (population growth, more concentrated settlement, higher values, settlement of zones exposed to heightened hazards), but are also due in part to the improved availability of information on events in remote areas; however, there is a good deal of evidence indicating that the various increases in the annual rates of weather-related and geophysically caused events also have to do with climate change. If both these trends were attributable exclusively to socio-demographic causes, the rates of increase in weather-related and geophysically caused events would have to be more similar. Yet it would seem that the growing number of weather-related catastrophes cannot be fully explained without climate change. The view that weather extremes are more frequent and intense due to global warming is in keeping with current scientific findings as set out in the Fourth IPCC Assessment Report.

COVER: What programmes or plans has Munich Re initiated to reduce risks presented to insurance companies by global warming, both in South Africa, and globally?

Dr Arnoldussen: For a while now we have been appealing to the critical conscience of our business partners and particularly stressing that Africa is not immune to the impact and effect of Global warming and climate change . In this regard we are working closely with some of the role players in measures designed to improve risk selection, loss mitigation as well as to influence legislation in an appropriate manner.

COVER: To what extent are reinsurers and insurers able to assess their exposure in this sector, given that many of the risks will be manifested in the future? How will they protect themselves if this keeps escalating?

Dr Arnoldussen: In recent years, the company has built up considerable expertise in the renewable energies sector and set up dedicated teams working on new solutions on the field of renewable energies. With this know-how, Munich Re is able to write special renewable-energy risks and thus, in many cases, to play a crucial role in making investment in future technologies possible. We also think that with our expertise we are able to model these risks properly.

COVER: Is Africa in a position to be able to deal with the increasing threat of Global Warming? Is there enough focus on this, especially with all the political turmoil and the fight for economic survival?

Dr Arnoldussen: The humanitarian consequences of climate change are at least as obvious in Africa as elsewhere. Thousands in these regions are regularly affected by devastating droughts and, as a result, famine will worsen in some part of Africa as climate change progresses. Africa will also be severely hit by floods brought about by climate change. Under the United Nations Environment Program co-sponsored initiative to develop the Principles for Sustainable Insurance, the role of insurance in addressing some of the known impacts of climate change is highlighted. The Munich Re is a strong supporter and backer of this initiative, in addition to initiatives we are driving under our own steam. In this regard, the Dii initiative, which seeks to convert sun energy from the Sahara Desert into electricity for consumption in the North African states and export to Europe is an instructive example of Munich Re’s innovation and thought leadership in this area.

Infrastructure Development

COVER: Why is this an area of focus for Munich Re?

Dr Arnoldussen: Munich Re expects substantial economic development in the next 10 to 20 years, both for individual countries and for the reinsurance market as a whole. Various countries in Africa are currently showing dynamic growth with substantial investment in infrastructure – a key element in unlocking economic development. There is a great deal happening already: projects for the building and refurbishment, new /old power generation, roads, railway lines, ports and pipelines. This represents exciting opportunities for Munich Re in the area of Engineering insurance – a Munich Re speciality.

COVER: How does Munich Re assist in this environment?

Dr Arnoldussen: There are a number of infrastructure projects in the region we participate in as reinsurers. Projects Munich Re is involved in outside South Africa include hydro electric power stations and dams in Uganda and Ethiopia. Our involvement with projects like the World Cup 2010 soccer stadia, the Gautrain and other infrastructure projects is already well known.

In line with its philosophy of promoting renewable energy projects throughout the world, Munich Re recently participated in a further project: an erection all- risks policy worth some €200m to cover the Ashegoda wind farm in Ethiopia. The plant will house 120 turbines with an installation capacity of 120 MW.

COVER: Have you seen an increase in uptake of appropriate insurance and reinsurance with regard to infrastructure developments in Africa?

Dr Arnoldussen: Given the complexity and values of the projects (mainly civil works and hydro power plants), clearly there has been an increasing trend. However, there is significantly increased competition especially in the provision of capacity and this is where we have a distinct advantage given our local footprint as well as technical prowess in these areas. Munich Re took a decision to play a leading role in this field, hence our having a leading share in the likes of the Gautrain, ACSA projects, and so on.

COVER: What has Munich Re’s loss experience been in this sector of African reinsurance business?

Dr Arnoldussen: Touch wood, so far the experience has been favourable although the trend is upward especially in respect of infrastructure damages due for instance to floods in some parts .One should remember that these projects run over several years and the possibility of a claim is always there. What sets us apart though and partly the reason for the good claims experience is the engineering skills we deploy to accompany these projects with risk management input.




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