Megacities – megarisks

Munchener Ruck worries about insurance coverage of cities with millions of inhabitants

The scale of the tsunami disaster in South Asia has exceeded even the worst fears and pessimistic forecasts. This applies first and foremost to the countless human tragedies, but also to the material damage, the astronomical size of which poses unprecedented challenges for the affected countries and the global community. Insurance companies in many places also face these. According to the world’s largest reinsurer, Munchener Ruck, 2004 was the worst year on record "the most expensive natural catastrophe year in insurance history to date". Even before the Asian seaquake, insured losses topped $40 billion, with more than $35 billion caused by hurricanes and typhoons.

Megacities - megarisks

Satellite image of Tokyo. Image: Japan Aerospace EXploration Agency

On the occasion of the World Conference on Disaster Reduction, which will be held by the United Nations from 18.-22. On the occasion of the 2nd Conference in Kobe, Japan, on January 1, Munich-based Ruck has published a study entitled Megacities – Megarisks: Trends and challenges for insurance and risk management.

This is about the risk of the so-called megacities, which the insurance industry describes as "Highly complex coarse risks" natural and environmental disasters, industrial accidents and terrorist attacks can have a particularly devastating impact in metropolitan areas of ten million or more people. Even temporary climate changes – such as the hot spell in the summer of 2003 – led to an unprecedented number of fatalities in megacities, as higher temperatures, air pollution and storm risks have a direct impact on the health of the inhabitants. It goes without saying that epidemics also have a good chance of spreading quickly and uncontrollably here.

As an example of "major loss events in metropolitan areas" the insurance company cites the 1906 earthquake in San Francisco. Almost 100 years ago, about 3.000 people died, and the property damage was so immense that Munich Re had to pay 15% of its premium volume at the time to settle the claim. The 1995 earthquake in Kobe, Japan, which killed 6.000 people lost their lives, became the most expensive natural catastrophe of all time. Even though the insurance industry did not have to take action in many cases, the economic damage amounted to over 100 billion US dollars.

Light from the cities of Asia. Image: Nasa

What this figure would have been in extremely dangerous cities such as Tokyo or Miami can only be guessed at present. However, the risks u.a. with population growth, which is expected to accelerate further in the coming years. Experts estimate that the population of Seoul-Inchon (South Korea), where 20.3 million people were registered in 2003, will reach 24.7 million in 2015. Sao Paulo (Brazil) grew from 17.9 to 20 million inhabitants, Mumbai (India) from 17.4 to 22.6, Delhi (India) from 14.1 to 20.9, Jakarta (Indonesia) from 12.3 to 17.5, Dhaka (Bangladesh) from 11.6 to 17.9, Karachi (Pakistan) from 11.1 to 16.2, Cairo (Egypt) from 10.8 to 13.1 and New York from 21.2 to 22.8.

Megacities are also classified as megarisks in the current study because in the event of the above-mentioned or comparable catastrophes, several properties and insurance classes are always affected at the same time. In these cases, personal injury, liability and property insurers find themselves "Accumulation risk" The extent of the risk is difficult to calculate, and it may even exceed the insurers’ ability to pay.

To improve this situation, Munich Re has developed a natural hazard risk index for megacities and is also working continuously on precise geocoding. Computer models will be used to analyze the risk potential in each individual case so that, if necessary, liability limits or risk exclusions can be agreed. In addition "Innovative insurance solutions" The demand for risk management measures, such as bonding to protect investments in large-scale projects, microinsurance for companies in developing countries, or the creation of additional capacities and risk compensation possibilities, is growing.

The defense against the many potential hazards, which, incidentally, do not only threaten mega-cities, is of course not a task that can be solved by insurance companies alone. The protection of megacities, cities and villages requires societies as a whole to be more aware of risks and to take preventive measures – for example, in the form of early warning systems, which could have saved many thousands of lives in South Asia.