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Counting the Cost of Catastrophe

As is so often the case, Munich is once again better positioned than Hamburg—should one be concerned about catastrophes. Neither city, of course, is particularly at risk. There are no volcanoes in either city, neither metropolis lies in an earthquake zone and the danger of lightning strikes is comparable—roughly four strikes per year per square kilometer. For insurance analysts, the two cities are largely unproblematic.

But Munich is a tiny bit less problematic. Professor Peter Höppe, a climate researcher and a geological risk specialist, says that Munich has the advantage when it comes to possible dangers stemming from global warming. "It's further from the sea," he says of the Bavarian capital. "That means, fewer intense winter storms and less flooding."

Höppe works for Munich Re (MUVGN.DE), one of the largest reinsurance companies in the world. Munich Re insures insurance companies—a fact that may sound paradoxical but makes perfect sense. Life insurance companies, automobile insurers and home insurers are likewise concerned that something bad might happen. A storm could rip thousands of roofs off of houses. Cellars could be flooded. Cars might be pulverized by hail storms. It's the kind of damage they must pay for, and if they are hit by a gigantic wave of claims, they'll need a reinsurance company to back them up—like Munich Re.

The question remains, though, how high the premiums paid by the direct insurance companies should be and how great the damage must be before it becomes Munich Re's problem. And that depends on Höppe, and his estimation of the size of the risk posed by climate change.

Höppe's division collects data from around the world, examines studies and writes its own. Munich Re has catalogued more than 26,000 "natural incidents" since 1970, from flooding in Bangladesh to hail showers in the foothills of the Alps. The company has little interest in dramatizing the dangers of climate change, nor would it be profitable to underestimate the phenomenon. Höppe's employer simply wants to know what it will cost, both today and in the future.

Höppe, whose office is located in the trendy central-Munich district of Schwabing, is a friendly 50-something who tends to dress a bit more casually than his colleagues. His shirt doesn't quite match up with what one might expect to see in the hallways of an insurance giant. He started his career as a physicist, after all.

The hallways leading to his office are plastered with maps of potential dangers. Our world is full of volcanoes, earthquake zones and areas endangered by hurricanes. River valleys and coastal areas subject to flooding are highlighted as are drought-prone regions. The map of natural catastrophes is published anew each year, and each year the forecasts look a little bit grimmer. By the time one reaches Höppe's office, one has the feeling of being a bit under-insured.

It's not an effect that Höppe is trying to produce. He analyzes risk and doesn't sell insurance policies. But the maps do provide an excellent foundation for a discussion with Höppe.

Storms, Droughts, Weather

"Look here," Höppe says as he prints out a graphic. "Here you see the frequency of earthquakes in the last hundred years." A thin line ticks up and down as it runs across the page, but in general the tremor rate remains constant. It's the same story with volcano eruptions; the frequency has changed little in the last century. "These are events upon which humanity has no influence," Höppe explains. The risk that a power plant will be damaged or destroyed by an earthquake can be calculated. In 50 years, statistically speaking, the danger will be exactly the same.

Höppe now grabs a different graphic: changes in weather, storms and droughts. "Here, it is possible that humans play a role," he says. In recent decades, the curve shoots upwards as climate change begins to take hold. It is impossible to ignore, and it is Höppe's job to figure out what it will cost. He, of course, is most interested in the damage that might have to be covered by insurance policies.

In Germany, for example, researchers expect that, by 2040, the country will see more intense precipitation, with more rain than snow in the winter. An increase in flooding will be the likely result as drainage systems are not designed for the onslaught. Building insurance will likely become more expensive too, with more thunder storms producing more lightning strikes and, in the Alps, more boulders rolling down mountain slopes as the permafrost melts. Höppe is not the man to go to for good news.

Indeed, three of his employees are charged with scanning input from around the world each day looking for bad news. Earthquakes are reported by a seismology center in Switzerland, tsunamis come from a facility in Hawaii, Germany's National Meteorological Service keeps track of thunderstorms in Germany. Munich Re has access to a total of 200 catastrophe trackers.

On this day, the dose of daily doom comes in the form of an earthquake on the Indonesian island of Sumatra. Höppe's colleagues feed the data into a computer before sending a mail to the Munich Re office in Beijing. The branch there already has more information: the depth of the epicenter, the first damage estimates and the fact that no deaths have been reported.

Still, even if the damage is light, Höppe and his colleagues include the temblor in the danger atlas. Even if it has little to do with Munich Re's bottom line, every additional event makes the statistics that much more reliable.

Not long ago, Höppe says, Munich Re was approached by an insurance company specializing in providing coverage to the gigantic new car lots where auto manufacturers park their wares prior to delivery. The value of such a parking lot, full of shiny new sedans and SUVs, is huge—a dream for an insurance provider. But the dangers are large too. A dent in a single car wouldn't be much of a problem, but a large fire damaging several would be. The insurer was interested in sharing this risk with Munich Re.

Höppe took a look at where the insurance company's customers were located to find out what risks they might be exposed to. He entered the locations into his catastrophe map—and found out that 80 percent of the new cars were parked in exactly those zones where Höppe's models predicted heavy hail storms. One can buy insurance for such locations, of course, but it is expensive.

That too is Höppe's job. New dangers and new risks can be calculated and transformed into policies. An offshore wind park in the North Sea? Of course it can be insured, says Höppe. You just have to know the frequency and intensity of the storms there, how often wind turbines break down under such conditions and how long repairs take on average.

Munich Re thinks that even poorer countries like Bangladesh could eventually become customers as they seek to insure themselves against the consequences of global warming. The secretariat of the United Nations Framework Convention on Climate Change recently had Munich Re present a plan for how developing countries could insure themselves against the dangers of climate-related catastrophes. The countries responsible for global warming are to pay for the policies—the more CO2 a country emits into the atmosphere, the more they pay. Poorer countries would pledge to do what they can to limit damage, by not building settlements directly on the coast, for example.

Munich Re has more than 40,000 employees around the world, the old company offices in Schwabing long ago became too small. Some 1,100 workers now work in a high-rise on the edge of town, with buses commuting between the two sites.

Predicting People's Health

At the new base, Achim Regenauer works as a leading medical scientist. It is also important to know if and how people look after their health. After all, any company selling life insurance needs to gauge roughly how long its customers will live. But Regenauer has some fairly bad news. For decades life expectancy in industrialized countries has continued to climb, but that is no law of nature. People eat the wrong sorts of food, they are getting too fat—and that is causing health problems.

Regenauer, a specialist in internal medicine who has been working for the insurance firm for 19 years, turns to a powerpoint presentation that he uses when he wants to shock people. He points to a map of the US, illustrating the national rate of obesity in 1985. Some states are colored light blue, meaning that one in 10 people are obese. Some are dark blue which indicates that one in 15 is overweight.

Then he moves the clock forward to the next year and the colors change slightly. Before too long the range of colors fails to match reality. Soon the dark blue shade is not enough. Now there are states where 20 per cent of the population is obese, a brown shade is added, light brown and then dark brown, then red.

By 2007, a third of the inhabitants in many states are more than overweight, dangerously overweight. "And in reality," says Regenauer, "the facts are even worse." The numbers were obtained through telephone surveys carried out by the health authorities. And phone interviews are notoriously unreliable—women tend to fudge the facts when it comes to weight, men regarding their height.

In Europe the situation is slightly better, but not much. Regenauer is not solely concerned that Europeans are getting heavier but also that younger people are increasingly overweight. That has consequences for the calculations of insurance agencies.

The sums are quite straight forward: Anyone who is obese is more likely to get diabetes. Anyone who has diabetes is more at risk of dying from heart complaints. Years ago, when people tended to become overweight aged 50 or above, their weight made relatively little difference. They only started to suffer weight-related health consequences when they reached an age when other types of illness tended to set in.

"But now we see more and more young people with obesity," says Regenauer. "The question is: When will they get health side effects?" What will happen when today's overweight 20-year-olds turn 40 and an over-proportional number of them die? Then, Regenauer says, we will see a reality developing that many thought was impossible: "The life expectancy in industrialized countries will sink."

Provided by Spiegel Online—Read the latest from Europe's largest newsmagazine

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