Munich Re Analyzes “Megacities” Vulnerability

Munich Re presented its views at the UN’s World Conference on Disaster Reduction on the special problems faced by Megacities, defined as “conurbations with ten million or more inhabitants.”

These large groupings of people are especially vulnerable to natural perils, technological risks, terrorism and environmental hazards. The world’s largest reinsurer told delegates that more risk awareness and greater transparency is urgently needed with regard to thier hazard exposures.

“Such agglomerations are highly complex major risks, which present the inhabitants, politicians and the insurance industry with huge challenges, “said the bulletin. “Munich Re therefore calls for more risk awareness and prevention from all concerned. Greater transparency in terms of loss potentials and liabilities is a further prerequisite for insurability because major losses cannot be ruled out even if prevention is optimized.”

Stefan Heyd, whose responsibilities on Munich Re’s Board of Management include corporate underwriting, stated: “Megacities are exposed to all the classic risks, but their exposure and vulnerability are disproportionate. They create risks of new dimensions — megarisks. Conurbations in coastal areas could be threatened by tsunamis, for example, whilst Tokyo and Miami are instances of megacities in areas with major earthquake and hurricane exposures respectively. Future decisions on the sites to be chosen for development must take new findings into account. A concentrated effort must be made to improve risk prevention and control. The losses that may be caused by natural hazards, technological risks, terrorism and even epidemics must be identified and modeled in advance. This is the only way to ensure that the enormous range of megacity risks can be insured on a sustainable basis.”

There are some other consequences of urban agglomerations beyond increased exposure to natural hazards, weather and climate risks. Munich Re cited the “heat island effect of large cities,” which amplifies the impact of global climate change. Peter Höppe, the new head of Munich Re’s Geo Risks Research Department, noted: “In the unusual European summer heat wave of 2003, for example, the number of people who died in cities was vastly disproportionate to the population as a whole, and this despite the generally greater availability of healthcare services in urban areas.”

Munich Re also said: “Conurbations are at risk particularly in connection with accidents in the industrial sector and road, rail or air traffic accidents. Epidemics are a further threat, not least because of the relatively crowded conditions of human life in conurbations.”

Major loss events in the past evince the problem. Munich Re noted that the 1906 San Francisco earthquake and fire, which killed 3,000 people “remains even today the greatest loss Munich Re has ever incurred from a single catastrophe, costing almost 15 percent of its premium volume at that time. The largest technological accident in human history occurred in 1984 when a highly toxic gas leaked from an industrial plant in the Indian conurbation of Bhopal. As a consequence, 20,000 people have since died and untold numbers are still suffering from after-effects.”

It also said: “Further risks that are very difficult to assess in megacities are those deriving from the large and complex public utility networks. When explosive substances spread through the sewers in Guadalajara (Mexico) in 1994, whole streets were soon blown up. A further problem in megacities is air pollution due to ozone or dust and soot particles. A study has shown that in Bangkok 1,400 deaths are attributable each year to dust exposure. Since the attack on the WTC towers there has been a widespread awareness of the threat from terrorist attacks.”

As a result of the growing awareness of these kinds of risks, there is an increasing need to identify the dangers to which the population is exposed and at the same time to analyze the effects on life, health and disability insurance. Munich Re found that “in the property insurance sector, enhanced risk awareness has had a very stimulating effect on demand, especially in connection with major risks. Particularly in this respect, therefore, it is necessary to strive for greater transparency regarding the hazards involved.”

Munich Re’s new publication entitled “Megacities — Megarisks: Trends and challenges for insurance and risk management” is now available online at: www.munichre.com. In this brochure, Munich Re authors take an in-depth look at the risks from the insurance perspective and discuss insurance solutions with a view, for example, to the expected increase in demand for insurance coverage.