Watching the numbers

I had a university friend who worked in insurance.

Actually, I had a university friend who was snapped up by the insurance industry like a seagull grabbing dead baitfish off the beach.

Not selling policies, not at the front end.

No, he was a math whiz, one of those full scholarship guys who practically spoke another language, one that you couldn’t ever possibly understand.

He would take the time to spell out what he was studying, if you asked. Slowly. Carefully. It was like he was trying to explain a complicated chemical reaction to a ground hog. I could listen to him for hours, but I couldn’t even make his individual words make any sense.

He went straight into the actuarial side of the insurance business — they needed him to calculate risk, to use his ability to see and speak numbers to develop the resources to (I’m making it simple here) decide what premium price is worth gambling on whether me and you and everyone else in our risk pool will reach 65.

They paid him very, very well.

Very, very, very well. Because his math made them money — or more to the point, gave them the tools they needed to ensure that payouts and premiums were always in balance, including a healthy slice for the house.

I think about him when some missive from the global insurance industry — or even the global reinsurance industry, which, believe it or not, is out there making dry gambles on the margins left by the professional insurance business — talks about the weather. Or what the weather used to be.

This past week, the global reinsurance company Munich Re issued some details about its calculations for 2020’s “nat cat” losses.

“Nat cat” sounds a little jingly, but what it is talking about is the natural catastrophe losses from the past year. And 2020 was a bad year — the economic losses from natural catastrophes, according to Munich Re, hit US$210 billion.

That, if you’re keeping track, is US$44 billion more than in 2019. A 26 per cent increase — in a single year.

A Munich Re board of management member put it bluntly: “Record numbers for many relevant hazards are a cause for concern, whether we are talking about the severe hurricane season, major wildfires or the series of thunderstorms in the U.S.

Climate change will play an increasing role in all of these hazards.”

Now, part of that increase had to do with where “nat cat” events happened — in areas of the developed world that carry insurance.

But, “even if the weather disasters for one year cannot be directly linked to climate change, and a longer period needs to be studied to assess their significance, these extreme values fit with the expected consequences of a decades-long warming trend for the atmosphere and oceans that is influencing risks,” Ernst Rauch, chief climate and geo scientist at Munich Re told the industry journal Reinsurance News. “An increasing number of heatwaves and droughts are fuelling wildfires, and severe tropical cyclones and thunderstorms are becoming more frequent. Research shows that events such as this year’s heatwaves in northern Siberia are 600 times more likely to occur than previously.”

When my university companion got snapped up by the insurance business, it was for mathematics. If you read carefully in the lines above, you’d realize that the insurance business is now hiring climate scientists to help calculate risk.

Now, think about that again.

I’ll tell you right now: they don’t waste money.

Despite the “nat cat” increases and an even-larger insurance impact from COVID-19, Munich Re is expecting a profit of 1.2 billion euros for 2020.

Because, thanks to hard work, research and decades of strategic hiring, nothing’s really a surprise.