A Risk Index for Megacities

Stephen Voss (Munich Re Japan Services K.K.)

05 September 2006
at the Institute of Actuaries Japan (IAJ)Contents

Introduction - Trend of growing cities

3

Characteristics of megacities

8

The special risk situation of megacities

13

The Munich Re risk index for megacities

18

2

Introduction – Trend of growing cities

1950

2000

2050

2bn

6bn

9bn

30%50%60%

80

400?

Population worldwide

Urban population

Cities>1 million inhabitants

A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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Introduction – Trend of growing cities, cont’d

Megacities 1950
Tokyo

London
New York
Rhine-Ruhr
Moscow

ShanghaiParis

Buenos Aires

Source:U.N. Population Division4Introduction – Trend of growing cities, cont’d

Megacities 2015

Tokyo
Mumbai

Dhaka

Delhi
Kolkata
Karachi
New York

Mexico City

Istanbul
Paris
LondonSao Paulo

Los Angeles

Beijing
TianjinMoscow
Cairo
LahoreRhine-Ruhr

Seoul
Osaka
JakartaShanghai

Kabul
BaghdadChicagoTehranJeddahTorontoLima

Ho Chi Minh City
Surat

YangonBangkok

Bandung

Rio de Janeiro
Abidjan

Lagos
LuandaGuatemala City

Belo Horizonte

Bogotá

Buenos Aires
Santiago

Source:U.N. Population Division
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Introduction – Trend of growing cities, cont’d

Summary: Whereas in 1950 ten of the 15 most populous cities werein industrial countries, today’s picture is clearly dominated by cities
in emerging and developing countries…

Source: United Nations, 2004

A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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Contents

Introduction - Trend of growing cities

3

Characteristics of megacities

8

The special risk situation of megacities

13

The Munich Re risk index for megacities

187

Characteristics of megacitiesCommon features of megacities:
 High concentration of- people- values- infrastructure High interconnectivity within region / country / continent / world- close interdependence between flow of goods, finance and information- global cities are gateways (interaction between regional markets andglobal flow of information / goods)Î Global impact of megacities
A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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Example 1: Greater Tokyo – A megacity

Tokyo today:- A gigantic concentrationof values and people- Very high density ofbuildings- Worldwide interconnection
in trade and business

Picture of modern Tokyo

A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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Example 1: Greater Tokyo – A megaRISKTokyo 1923:- 143,000 victims

Picture of Tokyo 1923

(incl. missing persons)- 2.8 bn USD economic loss

A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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Example 2: Los Angeles

Development of the City of Los Angeles from 1900 to 2000

Erdbebengefährdung:
hoch
2000

sehr hoch

1950
1900
Earthquake risk
highvery high

A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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Contents

Introduction - Trend of growing cities

3Characteristics of megacities

8The special risk situation of megacities

13The Munich Re risk index for megacities

1812

Special risk situation: Climate

 Higher air temperatures (above all evenings and nights)- so-called “heat island effect” with a difference in temperature with asmuch as 10 degrees Celsius, example Shanghai Generally, lower air speeds in megacities- however, straight canyon-like streets generate jet effects with high windspeed
 Higher risk of torrential rain in the lee area of the city
 Greater risk of thunderstorms (lightning strokes)- high-rise buildings act like magnets and attract lightning
 Increased air pollution (ozone, dust, soot)- often formation of summer smog
A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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Special risk situation: Potential risks

 Natural catastrophes,
some examples: Earthquake in San Francisco (1906), heat wave during
the summer (global warming), hurricane Katrina that hit New Orleans Technological and infrastructural catastrophes,e.g. explosion of ammonium nitrate store in Toulouse in September 2001
 Social / political risks and terrorism,
as in the past in New York (2001), Madrid (2004) and London (2005)
 Epidemics and infectious diseases,
as SARS in 2003 in Asian cities, bird flu

A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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Special risk situation: Accumulation risk

Various classes of business may be affected:
 Life, health and workers’ compensation insurance
 Liability (e.g. industrial lines) Property insurance (private, commercial, industrial lines)- Property damage and business interruption

Î “Challenges” versus “opportunities” for insurers

A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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Special risk situation: Risk management

Approaches to solving or mitigating the accumulation problem:
Risk evaluation
 Assessment using appropriate scenarios and tools (“geocoding”)
Risk limitation
 Limits of liability
 Exclusion of risks (certain hazards, objects, areas)
Balance of risks (regional) Growing need for insurance in metropolises in developing countries

Î Risk prevention and reduction
A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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Contents

Introduction - Trend of growing cities

3

Characteristics of megacities

8The special risk situation of megacities

13The Munich Re risk index for megacities

18

17

The Munich Re risk index for megacities

Analysiswith focus on natural hazards due to:Data availabilityModeling capability

Risk assessment
Interregional comparison



Risk modeling

A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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The Munich Re risk index: Data sources- Online databases and information systems(e.g. Internet, Reuters Insurance Briefing)- Media reports(press, radio, television)- Worldwide network of contacts(scientists, official agencies, companies, technical seminars,workshops, expert opinion)- Technical literature(scientific reports, essays, conference papers, etc.)- Munich Re connections(subsidiaries, branch offices, liaison offices, service companies,
clients in more than 150 countries)
A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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The Munich Re risk index: Data sources, cont‘d

A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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The Munich Re risk index: Basics

 Objective: Comparative evaluation of the risk of material losses / loss
potential
 Synoptic view of all relevant natural hazards

Munich Re World Map of NaturalHazards; sub-components: groundmotion, shaking, subsoil conditions

 Earthquake + secondary effects (incl. tsunami)
 Windstorm Flood

Munich Re World Map of NaturalHazards; sub-components: tropicalstorms, extratropical storms, local storms
Development of new classificationsystem; sub-components: river flooding,flash floods, torrential rain, storm surge

 Other hazards (volcanic eruption, bush fire, frost)…under consideration of rare and frequent occurrences (PML and AAL)
A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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The Munich Re risk index: Basics, cont’d Overview over all index components
 Hazard
Earthquake, windstorm, flood, other hazards
 Vulnerability (or loss susceptibility)
Predominant type of residential construction, code compliance /construction standard, disaster preparedness, building quality andbuilding density
 Exposed values
Average value per household, GDP, global economic significanceA Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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The Munich Re risk index: Basics, cont’dIndex for hazard (max. value 10)(= Weighted sum of AAL’s (per risk) x 0.8 + highest PML x 0.2)

x
Index for vulnerability (max. value 10)(= Sum of all sub-components)x
Index for exposed values (max. value 10)(= Sum of all sub-components)

Total risk index (max. value 1,000)A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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The Munich Re risk index: ResultCityTokyoIndex asa whole1) 2)
710

Hazard *)Values*)10.0

Susceptibilityto loss *)
7.1

10.0

San Francisco

167

6.7

8.3

3.0

Los Angeles

100

2.7

8.2

4.5

Osaka

92

3.6

5.0

5.0

Miami

45

2.7

7.7

2.2

New York

42

0.9

5.5

8.3

Hong Kong

41

2.8

6.6

1.9

Manila

31

4.8

9.5

0.7

London

30

0.9

7.1

4.8

Paris25

0.8

6.6

4.61) Risk = Hazard × Loss susceptibility × Values2) Total material loss, not the insured share*) Scaled to max. value = 10

To be updated regularly
A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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The Munich Re risk index: Result, cont’d

A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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The Munich Re risk index: Result, cont’dReasons for Tokyo’s high ranking
 Very high exposure, i.e. absolute values and global meaning Extremely high hazard from multiple perils (EQ, Typhoon, Volcanic
Eruption)Relative ranking of top 6 megacities according to selected criteria
CityHazards (combined)

DensityHigh rise buildings

Household value

City GDP

1Tokyo-YokohamaKawasaki

112112

San Francisco-Oakland-SanJose

233553

Los Angeles-RiversideOrange county

4654

4

4

Osaka-Kobe-Kyoto

324335

Miami-Fort Lauderdale

456666

New York-Northern New
Jersey-Long Island

64

12

2

Remark: Ranking in each selected criterion does not necessarily represent the absolute ranking of the respective city in the context of all 50 megacities.
The ranking only depicts the position of each of the top 6 cities in relation to each other.

A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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The Munich Re risk index: Conclusion

1) In spite of several limitations and open issues …
 Insufficient data (flood hazard, preparedness, determination of city area) Predominance of earthquake
 Relative weight of main components… Munich Re’s risk index for natural hazards gives a realistic comparison
between the loss potentials of various megacities and can be taken as an
initial indicator for the analysis of risk potential!
2) Megacities = Centers of developments with impact on the rest of the world New risks, new markets and new insurance solutions

A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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Munich Re’s brochure “Megacities – Megarisks”

Download in pdf-format:
www.munichre.com/publications

A Risk Index for Megacities, S. Voss (05 September 2006, at IAJ)

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Thank you very much for your interest!
Stephen Voss, Munich Re Japan Services K.K.