Lloyd’s is hosting a conference on climate change in Brazil today.  We have sponsored a report:  ’Climate change and Extreme events in Brazil‘ written by leading Brazilian climate experts to consider the impacts of climate change on Extreme weather risks, Energy, Agricultural Production and Sea level rise.

The report highlights that climate change is being felt already in Brazil.  In Southeast Amazonia, river flows have slowed or even stopped altogether on some occasions impacting navigation and trade; and causing forest fires leading to airport closures.  The link between climate change and economic impacts is clear. 

Over the coming decades a variety of impacts are likely to arise; many of which we are only beginning to understand.  The Amazon may dry out under some projections; if this happened it is likely to affect the climate around the world.    Extended dry periods would reduce the efficiency of hydro power stations – the dominant source of electricity in Brazil.  Strong winds, like those produced by Hurricane Catarina the first recorded tropical cyclone in the South Atlantic, may damage electricity transmission lines.

Only yesterday, the BBC reported that a severe storm caused widespread power cuts which lasted more than five hours, and left up to a fifth of Brazilians without power.

 Agriculture is responsible for 30% of Brazil’s GDP.  The majority of crops will see a reduction in yield as their potential cultivation area is reduced when conditions become unfavourable for them, though sugar cane may see an increase in yields.  This will create a strong impetus to genetically engineer crops to become tolerant of the new conditions; this brings its own risks as discussed in our Emerging Risks report on Synthetic Biology

The city of Recife is shown to be one of the most vulnerable to sea level rise, with over 80% of its buildings within 30m of the sea.  Yet the report warns that adaptation will only come if the public become engaged with the issue and highlights a number of ways this could be achieved.

We hope this new report, and the conference will lead to further debate on climate change between academics, businesses, policymakers and the public in Brazil.  To tackle climate change we must work together; that message is as true in South America as anywhere.

Looking back, this time last year the catastrophe bond market was noticeable only for the tumbleweed – it was deathly quiet. This year the level of activity has picked up. Guy Carpenter has released their Q3 update, which provides a really useful summary of recent activity. Over the last quarter there were two new issuances, resulting in $412m of new capital in the market. Despite this relative calm – the issuance was up by a third when compared to the same quarter last year. This takes the total so far this year to 11 (with MultiCat Mexico 2009 coming soon), that makes $1.79bn in risk capital.

However, the fourth quarter is upon us and broader market conditions appear to be more conducive for more activity. The pipeline looks healthy right now, and historically, Guy Carpenter say the fourth quarter is the second most active of the year. GC’s consensus estimate for the year remains $3bn to $4bn, implying a strong fourth quarter for primary issuance.
One of the other features of this sector, as it begins to mature, is that there is a slug of outstanding risk capital that has matured. In the third quarter of 2009, $300m in catastrophe bond risk capital matured, bringing the year-to-date total to $2.5bn. Another $660m is scheduled to mature in the fourth quarter of this year.

Tags: catastrophe bonds

Monday morning, Tropical Storm Grace appeared as a surprising addition to this year’s named storms. Grace formed at 41.2degN near the Azores Islands. According to some reports this is notable in that Grace could well be the farthest northeast that a tropical storm has formed since the inception of satellite monitoring in the 1960s.

(Tropical Storm Alberto in 1988 formed slightly further north at 41.5degN). Grace is also unusual in that the storm formed over sea surface temperatures of only c23degC. Normally, tropical storms require temperatures in the region of 26-27degC to form and be self sustaining.

Grace looks as though she will bow out today, and transition into an extra tropical storm.

Tags: Atlantic, Grace, Tropical Storm

A new report on digital risks has been published by the Lloyd’s Emerging Risks Team.  The report was made available in the event packs distributed at the recent joint event between Lloyd’s 360 Insight and NATO on three important risks facing society, namely climate change, digital security and piracy.

Read the rest of this entry »

Tags: Digital risks, digital risks report, Emerging risks

According to their press release on 23 September “Students studying risk management and natural hazards-related subjects will soon benefit from scholarships to be offered by the Caribbean Catastrophe Risk Insurance Facility (CCRIF) ”

The CCRIF is the Caribbean insurance pool which pays out when certain parametric earthquake or hurricane indices reach a threshold.  The pool provides fast liquidity to islands that can see multiples of their GDP wiped out in a single event.  The pool purchases reinsurance and the Lloyd’s market (via Hiscox) has been involved.

CCRIF explain that their intention is to help Caribbean islands increase their knowledge on natural catastrophes and climate change.  It is interesting to see this development in advance of the landmark Copenhagen meeting on Climate Change later this year which, it is hoped, will bring a major change in the politics of climate change.  Many stakeholders have submitted proposals to this meeting and at least two of these relate directly to insurance.

The proposals by AOSIS (Alliance of Small Island States) and the MCII (Munich Climate Change Initiative) both believe that insurers have a key role to play in helping the developing world adapt to climate change.  First they believe that countries must adapt and thereby attempt to offset the growing risk (for example by building flood defences, changing building methods, increasing risk management education); but they both admit that adaptation will not remove all risk and some of the residual risk can be pooled by insurers and reinsurers. 

The new CCRIF announcement is a good example of the education on risk (sometimes called “capacity building”) that adaptation will require.  They also state they will assist with disaster reduction schemes, which makes a lot of sense; by reducing the risk the pool will go further.

Deep and rapid cuts in greenhouse gasses are essential.  Yet there will be many years of unavoidable change (probably at least 100) and the global efforts to adapt will bring opportunities to those adept at managing risk.  Insurers have a lot to offer and need to be ready to act.

Tags: Climate change, Emerging risks, Hurricanes, Natural catastrophes

A symposium from 9-10 July took place in Washington DC to discuss the ‘opportunities and challenges’ in the emerging field of synthetic biology.

 According to organisers the meeting brought “together the scientific, engineering, legal, and policy communities along with members of the public”.  This seems an excellent step forward in this exciting but potentially risky field.

So what is synthetic biology?

This is the subject of the latest report from the Emerging Risks team at Lloyd’s (Synthetic Biology: Influencing Development, pdf, 1.2mb).  In a nutshell it’s the next development in genetic modification techniques….

…the ‘Traditional’ Genetic Modification (GM) method cuts DNA from one organism and pastes it into the genome of another, thereby creating a new organism.  It seems odd to use the word ‘traditional’ but in fact these techniques have been around since the 1970s.  The new field of synthetic biology doesn’t need to copy existing DNA; it can create its own—first on the computer and then physically—literally from a primordial soup of raw materials. 

Synthetic biological techniques could be transformative.  Some dreams which are not too far from reality include: engineering bacteria to produce biofuels or cheap drugs; and altering plants to be heat, salt and drought tolerant.  Such successes could be critical in the fight against climate change, water and energy shortage and population growth.

But there are risks, or at least there could be without responsible innovation and appropriate regulation.  A key concern is that, as the techniques rapidly become simpler and cheaper, terrorists will be able to use the new techniques to grow bio-weapons. 

Another concern is that it is almost impossible to predict how an ecosystem will react to a new organism—genes may be swapped unintentionally (this has already happened with some GM plants); and the same goes for human health—we don’t know how these new substances will affect us.

Our new report suggests that the next steps should include:

• mapping uncertainty and then filling the knowledge gaps with a particular focus on understanding health and environmental risks, considering whether existing regulations are appropriate or whether international coordination is called for
• considering extreme high impact, if low probability scenarios as part of risk management
• and tracking the uses of synthetic biology, including mandatory labelling in food.

While it’s still early days, it does appear that a number of insurance lines could be affected in future, so insurers should monitor developments in this field carefully.

Another of our suggested actions is that focus groups should be run involving all stakeholders; so it’s good to see that the symposium mentioned above involved the public.  It will be interesting to see what they conclude.

Download the report: Synthetic Biology: Influencing Development (pdf, 1.2mb)

Tags: Emerging risks, Synthetic biology

The UK government has published its first Cyber-security strategy that ‘explains what the government will be doing to ensure [cyberspace's] safety, security and resilience’.

This precedent is another reminder that UK society is increasingly taking advantage of, and relying upon, digital and communications technology.

The document puts the average cost of a security-information incident at between £10,000 and £20,000 for a small company; and £1 to £2m for large companies with more than 500 employees; and that the incident can be perpetrated by a range of individuals or organisations (source: BERR Information Security Breaches Survey 2008, PwC). 

The perpetrators can include criminals, terrorists and states. They can use a variety of methods: from electronic attacks to gain or deny access to information and subversion of supply chains to more overt attacks, such as manipulating radio signals or damaging unprotected electronic equipment through high power radio transmissions.

The report indicates that the impact will vary according to the target and wider context and that the probability of these attacks occurring increases when a so-called ‘insider’ within the target organisation is involved.

Two new governmental structures will be created, one of which will be entitled the Cyber Security Operations Centre (CSOC) and will help to ‘ensure coherent dissemination of information across government, industry, international partners, and the public’. 

This may become a useful resource for insurers wanting to keep track of cyber risks that could impact their books.
Another source of information that may be useful to insurers is the Centre for the Protection of National Infrastructure (CPNI) which ‘has built up strong partnerships with private sector organisations across national infrastructure, creating a trusted environment where confidential information can be shared for mutual benefit’. Such information may help insurers to better assess their digital risk portfolio and their own operational risk.

The Lloyd’s Emerging Risks team is currently investigating the potential impact on insurance of an increasingly digital economy and society and will soon publish a summary report.

Related links
Cyber-security strategy launched, BBC news, 25 June 2009

Tags: Cyber, Digital risks

The Atlantic Tropical Storm and Hurricane Season officially begins on 1 June. With less than two weeks to go we thought this an opportune time to give you an update on how some of the most respected forecasters see the 2009 season.

In recent years the first named storm of the season has actually begun outside of the ‘official’ season. Last year Tropical Storm Arthur formed in the Gulf of Mexico on the 31 May. In 2007, Subtropical Storm Andrea and Tropical Storm Barry both formed before 1 June.

It’s time to turn our attention to 2009 activity, and again, sooner than perhaps we had originally anticipated—Dr Jeff Masters’ Weather Underground blog  flagged up one storm to keep an eye on from the morning of 19 May.  The storm didn’t develop into a tropical storm, however, an interesting precursor to the season, as some areas in Florida are deluged by rainfall.

Historically, we’ve seen how forecasters have changed their forecasts over the season, and we’ll look to provide an update on this situation later this summer. However, as the season begins, here’s the latest from some of the more highly respected forecaster organisations:

The hurricane forecasters are predicting an average season, with an average/slightly above number of tropical storms and hurricanes forming when compared to the 1950-2000 baseline.

With reference to the heightened activity observed from 1995-2008, we may well be looking at an average season.

Just because the forecasts predict an average season, it doesn’t mean that the (re)insurance industry should sit back and relax: it’s not the number of storms that count, it’s the intensity and also if landfall is made.

So as ever, insurers and reinsurers need to keep a close eye as the season progresses. And let’s not forget that although we may have a focus on the Atlantic season, the Pacific Typhoon season  is also in progress—and from a nat cat perspective, every day is earthquake season…

Tags: Hurricanes

A spurious (yet timely) titled lead into an area of the catastrophe bond market that is often over looked—namely, the mortality catastrophe bond market.

The recent incidence of Swine flu has brought some attention to the mortality bond market, and cat bond market issuers and investors will doubtless be keeping a watchful eye on the development of the outbreak with some interest.

Artemis.bm  reports that there are currently somewhere between USD1.5-2bn of outstanding mortality bonds in the cat bond market. The majority of these bonds have been issued by Swiss Re (via the Vita Capital Series), and most recently by Munich Re in February 2008, with USD100m of risk transferred to the capital markets. Other notable issuers include Axa and Scottish Life.

How material an issue is the current outbreak for bond investors and issuers?

It is clearly far too early to state, given that we are in the early stages of the pandemic. However, it may be useful to provide some context. An extreme mortality bond pays out to the sponsoring insurer if the mortality index to which it is linked exceeds a certain rate, typically 20% or more above what is expected for a given population.

The 1918 Spanish influenza pandemic, in which more than 50m people died, is the benchmark by which all modern pandemics are measured. And for any bond to be triggered, we would expect to see mortality rates of this order (ie millions not hundreds or thousands). The early news stories around the current Swine flu has some interesting characteristics, including a higher mortality rate when compared to 1918, although as at 30th April, only one fatality has been reported outside of Mexico.

The Insurance Information Institute estimated in 2006 that even a moderate avian flu pandemic could cost the US life insurance industry $31bn in additional death claims, while a pandemic on the scale of 1918 could cost $133bn.

The market has yet to see any impact on bond pricing – primarily due to a) the magnitude of the fatalities to date, and b) the geographic areas impacted (ie limited to Mexico). There may be far more concern if the number of reported cases increases exponentially and begins to impact the US and western Europe in particlar.

So the market will continue to watch the developing situation with interest, as will we all…

Tags: Bonds, Flu, Natural catastrophes, Pandemic

The Emerging Risks Team at Lloyd’s has been looking at the economic and insurance impacts of pandemics and published a report into the possible insurance impacts of a pandemic (pdf) in 2008, which was also summarised in this recent CII think piece (pdf) .   

The current strain of flu that’s causing concern is of the H1N1 type; different to the H5N1 strain (or ‘bird flu’) that made the news several years ago.  The new strain is from a mixture of a swine virus, human flu and, in fact, bird flu.

According to the World Health Organization the majority of people will not have immunity unless they work with pigs.  Once a strain is isolated work on a vaccine can begin but this is likely to take several months to prepare. 

In the meantime antivirals (which help to suppress the full effect of the virus) can be prescribed; it appears that oseltamivir and zanamivir are effective.  A key concern is that a virus will have immunity to antivirals; but at the moment this appears not to be the case, which is fortunate.

The current WHO ‘preparedness phase’ has now been raised to level 4.  The WHO is not recommending travel or trade restrictions.  They have already concluded that containment of the outbreak will not be possible because it has already been identified in many locations. They stress that a pandemic is not inevitable but that it is now more likely.

The excellent on line encyclopedia wikipedia once again shows its worth with an article  that shows suspected cases around the world. These are being mapped live (below) and include unconfirmed cases ranging from the US, UK, Spain to New Zealand.

View H1N1 Swine Flu in a larger map

Note that only 45 cases have been laboratory confirmed with another 1807 cases only “influenza like”.  According to the Centres For Disease Control and Prevention there are small number of confirmed cases from the east to west coast of the US (see graphic).

Restricting the view to just Mexico we see 152 deaths out of 2761 cases, which is appears to be a “case fatality rate” of over 5% (compared to 2.5% for the 1918 “Spanish flu” virus which killed tens of millions, though lower than bird flu which is still at a worrying 60%). 

The case fatality is the percentage of people who are ill with the flu who go on to die from it.  It is likely that a number of cases are unreported (whereas deaths are likely to be tracked accurately) so the true case fatality rate is probably lower than the basic statistics suggest; time will tell.  As you can expect there is some conflicting information on numbers with wikipedia showing 50 confirmed cases in the US and the CFC showing 40.

In the event of a major pandemic the insurance industry will potentially have to cope with an variety of claims, while it is still reeling from its own business continuity problems. Life and health insurers will be directly impacted but less immediately obvious losses could arise, from medical malpractice to event cancellation.

One of the key issues raised is that a major pandemic is thought likely to cause a global recession – given the current financial state of the world’s economy a pandemic could not be worse timed.  At present however, there is good reason to hope the impact of this flu will be manageable; we will continue to monitor the situation.

Tags: Flu, Pandemic