New Delhi: For the first time, overseas reinsurers are considering using global warming and changing weather conditions in India and other countries as a criterion to set the rates they charge insurance companies to carry a part of the risk on the disaster policies they sell.
At least one overseas reinsurance company—Germany-based Munich Re AG—is already considering charging increased premiums next year, deeming global warming to be a risk in policies covering natural calamities, and is in discussions with insurers.
Force of nature: A flooded village in Madhubani, Bihar, in August last year. Scientists suspected global warming to be the cause of the floods. Deepak Kumar / AFP
“There is a need to revise the prices which reflect risks,” said Tobias Farny, a senior executive at Munich Re, in an interview during a visit to India. “We will not increase it for all (clients) but it should be on an individual basis.”
Reinsurers have been calling for the inclusion of global warming as a criterion for calculating the premiums they charge insurers for disaster policies. “We started factoring in changing weather patterns after the hurricane seasons 2004 and 2005 in the US and the Caribbean. In other areas we are still in the evaluation process as to which degree the available scientific data justify such an approach,” said Farny.
Accelerating global warming, caused by the burning of fossil fuels that produces heat-trapping greenhouse gases held responsible for the phenomenon, increases the risk of natural hazards such as cyclones, floods and earthquakes, some scientists say.
“Reinsurers have world over started considering weather changes in prices because of growing losses,” due to natural calamities, said a New Delhi-based reinsurance broker, who didn’t want to be named. “So far, the factor was ignored in calculation of risks.”
Reinsurers such as Swiss Re and Munich Re assume part of an insurer’s risk in large policies in return for part of the premiums the insured pay. This allows an individual insurer to take on clients whose coverage would be too risky for it to carry alone. Reinsurance also helps reduce the amount of capital insurers need to sell policies against risks including natural calamities, sickness, death, accidents and lawsuits.
“If we look at the projections for global warming and situation in India, then in years from now that losses will grow if we don’t take preventive steps,” said Anselm Smolka, head of the department of geophysical and hydraulic risks at Munich Re. “Climate change is a growing concern. We have a group of people looking at it. We want to address it to create an awareness...if we ask for premium we should we able to tell what it is charged for.”
Reinsurance rates are renewed every year. In India, renewals will fall due on 1 April 2009, Farny said, adding that the reinsurer has already started discussions on revised rates with its customers.
According to Munich Re, the insurance industry had to cope with $75 billion (Rs3.75 trillion) of natural catastrophe losses in 2007, a 50% increase from the previous year. Last year was among the seventh warmest on record worldwide, Munich Re said in a report on its website, citing data published by the Hadley Centre in the UK for the period up to December 2007.
“Weather patterns are changing. In India you don’t have quality data to put estimation in case of major catastrophes,” said an insurance expert with an overseas insurance broking company. He didn’t want to be named because he is not authorized to speak to the media.
In India, general insurance premiums have been falling after deregulation, leading to a fall in what reinsurers earn.
“Indian markets were deregulated two years ago and since then (premium) prices (of general insurance companies) have been falling quite a lot and what we are slowly seeing is that we have found the bottom levels,” said Farny.
Insurance companies are required to insure 10% of their risks with the state-owned General Insurance Corp. of India (GIC), the national reinsurer. About 70-80% of risks are reinsured outside India.
GIC, however, does not foresee any immediate increase in reinsurance rates, said M. Ramprasad, general manager.
“We have not seen any visible changes in weather pattern to invite revision in prices,” he said. “Change in prices will not be based on this input but ...more on claim ratio...there will be a soft market until there is some big loss happening. Till then we are not seeing any change in pricing.”