Tokyo (SCCIJ) – Swiss Reinsurance is well prepared to cover significant losses of its clients from natural catastrophes in Japan and the rest of the world, more than 40 SCCIJ members and guests of the November Luncheon learned from speaker Jens Mehlhorn. He is the Head of Property Underwriting Japan of Swiss Re. Even in case of disasters with high losses, the largest reinsurance company in the world would be able to stay in business due to its proprietary risk assessment models and very strong capital base. The speaker also had some good news: Japan is better prepared for catastrophes and less underinsured than many other countries.
SCCIJ November Luncheon speaker Jens Mehlhorn, Swiss Reinsurance Japan
Two damaging typhoons
In 2018, total economic losses from natural catastrophes across the world amounted to an estimated USD 155 billion, the fourth-highest one-year total in history. About half of these losses were insured. This year, two storms afflicted substantial damage to Japan. According to the estimate of Swiss Re, the typhoon Faxai in September caused insured damages of USD 7 billion. Swiss Re will pay out USD 460 million to its clients. An independent body estimated the insured losses of typhoon Hagibis in October at USD 7-11 billion. “But we have not made our judgement yet because we have not received the full loss advice from our clients,” Mr. Mehlhorn said.
The general picture of natural catastrophes in Japan looks similar over the last four decades. The most expensive events were the earthquakes in Kobe in 1995 with USD 135 billion and in Tohoku and Fukushima in 2011 with USD 238 billion. Most of the losses were uninsured. “There is a huge protection gap,” the speaker stated. For example, only 17 % of the Tohoku earthquake damages were covered by insurance. Among the reasons are a lack of appropriate insurance products and that the risks are unknown. “Swiss Re wants to make the world more resilient, increase the penetration of insurance and close the protection gap.” he explained.
At the same time, the historical data show a trend of increasing economic and insured losses. One possible cause would be climate change, but it would be too early for a judgement of how much. “Scientists are looking at the average of the number and strength of events over 30 years,” he said. But weather-related losses have already increased because coastal areas are becoming more densely populated. With the accumulation of people and higher value assets in these areas where risk exposure is higher, losses will continue to grow.
Members and advisors of the SCCIJ Executive Committee with November Luncheon Speaker Mr. Jens Mehlhorn
A proprietary risk assessment model
Swiss Reinsurance has developed its own “four-box model” to assess the risk of typhoons. “We are looking at the hazard, the vulnerability, the value distribution, and the coverage conditions,” Mr. Mehlhorn said. The model combines information of its insurance clients with historical data on typhoons. In addition, it generates over hundred thousands of simulated events by cloning each past event into 200 secondary events. Then, a computer generates a loss frequency curve, which gives the probability of a catastrophe with high losses.
“On this basis, we can calculate the premiums for reinsuring our clients,” the speaker explained. Currently, a hurricane in the U.S. with USD 150 billion estimated insured damages has the highest loss potential, followed by an earthquake in Japan with insured losses of USD 90 billion.
A reinsurance company would play a significant role in insuring such big events. “The principle of insurance is diversification,” the speaker declared. Thus, Japanese insurance companies could diversify their risk in Japan with risks outside of the country. This diversification would be the task of Swiss Re. “As a result, our clients can reduce their capital and lower their costs, which is the value proposition of reinsurance,” he said.
SCCIJ November Luncheon with more than 40 members and guests attending
Innovative capital collection
The Swiss reinsurance giant shoulders its own risk with the help of substantial capital reserves, currently as high as USD 30 billion, enough to finance two significant events and still continue with its business. As part of the initiative to strengthen its capital, Swiss Re issues cat bonds with high-interest rates, which will default in case of a big catastrophe. “Such bonds are highly attractive for investors also because they do not correlate with the regular bond market,” Mr. Mehlhorn said.
In the Q&A part of the luncheon, Mr. Mehlhorn explained that insurance premiums in Japan are lower because of a higher preparedness and thus less damage in case of an event. “The buildings are better built for resilience, so I am happy to be here in Japan,” he said with a smile. In Switzerland, insurance against natural catastrophes would be compulsory. “In other countries, we showcase Switzerland as an example of good practice for natural catastrophe risk transfer because this would make the world more resilient for disasters,” he said and earned long applause for his speech.
Biography of the speaker
Dr. Jens Mehlhorn leads the team of Property Underwriters in Japan. He joined Swiss Re in March 2000 as a Flood Specialist. Between 2003 and 2014, in his role as Head of Flood Group, Mr. Mehlhorn was in the lead for the built-up of Swiss Re’s flood risk assessment tools. From 2014 to 2019, he managed the property treaty book in Latin America. Before joining Swiss Re, Dr. Mehlhorn coordinated the Post Graduate School of Natural Catastrophes at the University in Karlsruhe, Germany, and worked in New Zealand at the National Institute for Water and Atmospheric Science. He holds a Ph.D. in Natural Sciences from the University of Freiburg, Germany.
Text and photos: Martin Fritz for SCCIJ
