dealing with risk: a view from the world of catastrophe ... · a view from the world of catastrophe...
TRANSCRIPT
Dealing With Risk:A View From The World Of Catastrophe Risk Modeling
And Insurance
Richard J. MurnaneRPI/BIOS and Baseline Management Company, Inc.
8 June, 2010
MtnClim 2010
(Hurricane Fabian over Bermuda. Sept. 5, 2003.)
RPI Corporate Sponsors• XL Re Ltd.
• PartnerRe
• Amlin Underwriting
• Renaissance Reinsurance Corporation
• Axis Specialty
• Platinum Underwriters
• Nephila Capital
• State Farm
• Aspen Insurance
• Risk Management Solutions
• FlagstoneRe
Overview• Extreme events, insurance and reinsurance
• Climate change
– Insurance industry perception
– Offshore industry
Top 40 For Victims (1970-2009)
Swiss Re Sigma, 1/2010
Top 40 For Victims (1970-2009)
Swiss Re Sigma, 1/2010
Top 40 Property Cat Losses 1970-2009
Losses total $340 billion in 2009 dollars
Swiss Re Sigma, 1/2010
2008 Non-life Premium Volume
Swiss Re, Sigma 3/2009
US and Europe have ~75% of global premium: ~$1.8 trillion
US Hurricane Insured LossesLosses For Year Of Occurrence
1900 1920 1940 1960 1980 2000
125
100
75
50
25
0
Year
Bill
ions
US
$ (2
005)
Normalized Losses
1900 1920 1940 1960 1980 2000
125
100
75
50
25
0
YearB
illio
ns U
S$
(200
5)
After Pielke et al., 2006
Insurance Versus Reinsurance • Primary Insurance
– Regulated by states– Rates set by filing with state– Shed risk by purchasing reinsurance
• Reinsurance– Insurance for insurance companies– “Regulated” by ratings agencies– Accept risk from primary companies– Diversify risk by hazard and geography
Event Intensity
Even
t Fre
quen
cyPrimary Insurer’s Retention
Reinsurance Layer 1Reinsurance Layer 2
Reinsurance Layer 3
PrimaryInsurer’sRetention
Reinsurance Layer 4
Insurance And Reinsurance
How Do (Re)Insurers:
• Assess their risk?– Catastrophe Risk Models provide the
“technical price”.
Catastrophe Risk Model
Physical DamageRepair Costs
Damage
Terms of CoverageInsured Loss
ProbabilityLocation
MagnitudeDuration
HazardLocation
ConstructionAge
Occupancy
Exposure
How Do (Re)Insurers:
• Assess their risk?– Catastrophe Risk Models provide the
“technical price”.
• Price their (re)insurance?– Model results, in part, but also market
price, investment expectations, business considerations, …
Cat Market Price Cycle
Overview• Extreme events, insurance and reinsurance
• Climate change
– Insurance industry perception
– Offshore industry
“… future warming may lead to an upward trend in tropical cyclone destructive potential, and – taking into account an increasing coastal population – a substantial increase in hurricane-related losses in the twenty-first century.”
Changes In Hurricane Power?
Year
Sea
Surfa
ce T
empe
ratu
rePo
wer
Dis
sipa
tion
Inde
x
K. Emanuel, Nature, 2005.
Changes In Intense Hurricanes?
“… global data indicate a 30-year trend toward more frequent and intense hurricanes, …”
Webster et al., Science, 2005.
Or, No Change?
“Subjective measurements and variable procedures make existing tropical cyclone databases insufficiently reliable to detect trends in the frequency of extreme cyclones.”
Landsea et al., Science, 2006.
“… the increase of [vertical wind shear] has been historically associated with diminished hurricane activity and intensity. A suite of state-of-the-art global climate model[s] project… [s]ubstantial increases in tropical Atlantic and East Pacific shear …”
Future Unfavorable Conditions?
Vecchi and Soden, GRL, 2007.
Upward Trend In Strongest Storms?
“We find significant upward trends for wind speed quantiles above the 70th percentile…”
Elsner et al., Nature, 2008
State Of KnowledgeIPCC, 2007 CCSP, 2008
“ClimateGate”
Each Company Is Different• In response to the large number of US landfalls in 2004
numerous reports released by insurance companies
–Munich Re:“The year 2004 was marked not only by an increase in the windstorm
exposure of areas that were already known to be at risk but also by individual exceptional meteorological events which provided further evidence of change processes in the atmosphere.” (in Topics GEO Natural Catastrophes: 2004 Annual Review)
–Swiss Re:“The generally high cyclonic activity of 2004 was unusual, but not
unexpected….This, however, lies within the range of natural climatic variation and is not necessarily indicative of global warming” (in Hurricane season 2004: Unusual, but not unexpected)
European Storm PerspectiveDecember, 1999: Anatol, Lothar, and Martin
ERC Frankona Munich Re
Lothar
Martin
Anatol Also, Benfield, Swiss Re, RMS (and others?)
Climate mentioned by insurer’s reports:– ERC Frankona: 1 time/28 pages– Munich Re: 28 times/76 pages
How, If At All, Do (Re)insurers Account For Climate Change?
Offshore Industry Interests
Top 40 Property Cat Losses 1970-2009
Losses total $340 billion in 2009 dollars
Swiss Re Sigma, 1/2010
Piper Alpha, 1988 - $3.6 billion
Deepwater Horizon MODUApril 20
Types Of Offshore Modeled Losses
• Physical damage• Operator extra expenses• Well control• Debris removal• Business Interruption• Contingent business interruption
Climate Change AndOffshore Insurance
• Reinsurer who actually writes offshore risk– Offshore insurance “behind the curve”– Prior to 2004/2005 there was complacency
• people were happy with Mineral Management Service (MMS) standards
• North Sea was the worry for severe storms - Gulf was in shallower water and a more “benign” environment
– Past 4-5 years focus on construction, anchoring, age, design, and orientation of rig
– Deeper water rigs in Gulf will be more like North Sea - wind not as important as wave height and air-gap
• Environmental issues covered (in 3.5 pages) are:– Deep-sea currents– Deepwater shipwrecks (finding
them is a benefit)– Environmental impacts, mainly
on biology• The word:
– “hurricane” occurs 5 times, mainly in conjunction with an explanation of a drop in production
– “weather” occurs 2 times (in a single paragraph)
– “climate” does not rate a single mention…
U.S. Department of the Interior, Minerals Management Service, Gulf of Mexico OCS Region, 102 pages, New Orleans, May 2008
U.S. Department of the Interior, Minerals Management Service, Gulf of Mexico OCS Region, 102 pages, New Orleans, May 2008
Conclusions• Cat models drive many business decisions and are
the mechanism by which science and engineering enters the business decision process.
• Market forces are bigger influence on pricing than interannual fluctuations in risk due to natural modes of climate variability
• (Re)insurers limit exposure by specifying covered risks, they can’t effectively price for events that haven’t happened in the past
• In my opinion:– Reinsurance will likely survive unless a catastrophic loss
collapses a company, rates will rise as losses mount– Insurers and buyers of insurance at most risk
Post-Piper Alpha• Piper Alpha loss in 1988 made insurers start to focus on
engineering– Reinsurers demanded more engineering information– Insurers started to monitor aggregation of offshore exposure
• Hurricane Ivan (2004) had ~$2.5 billion insured loss– Some of largest waves ever recorded, ~30m wave hit Chevron
Petronius platform, caused significant damage, and a production halt of nearly 6 months
– Classed by NHC as 2,500y event (current design parameters were for 100y storms)
– Caused small “hardening” in rates and increase in deductibles
Post Katrina And Rita (2005)
• Katrina/Rita (2005) had ~$20 billion insured loss– Damaged over 3000 platforms– 113 platforms destroyed, of these 108 were designed
to pre-1988 standards– Rates more than doubled, deductibles increased,
limits lowered
Offshore Industry In Gulf Of Mexico
Offshore structures: >4000Length of pipeline: >56,000 kmProperty Value: ~$150 Billion
MMS, 2008 MMS, 2008
Deepwater Horizon
Deepwater Rigs
MMS, 2008
Gulf Hurricanes And Insurance
• Flossie was first hurricane to cause widespread production halt in Gulf
• Instigated formation of API committee on Fundamental Research on Weather Forecasting (industry, academia, consultants)
Flossie, 1956
Clinton, 2008
Pre-Piper Alpha Disaster• Hilda (1964), Betsy (1965), Camille (1969)
– All but one platform destroyed by Hilda designed for 25y event.– Two 100y storms, one 400y storm in 6 years forced operators to
design for 100y event. – 75 foot waves in Camille higher than expected.– Mudslides and currents increased water depth so that some rigs
needed to be raised to increase air gap
• London Master Drilling Rig Cover formed after these storms, no use of engineers by insurers
• Move into North Sea increased insured values, but rates still supported profits
• Oil Insurance Ltd (OIL) formed in mid-70s, prided itself on not analyzing exposure, premiums based on assets and adjusted according to losses
Example CatXL Reinsurance ProgramM
illio
ns o
f $U
S
Primary InsurerLayer 1, Reinsurer ALayer 2, Reinsurer BLayer 3, Reinsurer C
Layer 4,Reinsurer D
Primary Insurer300
250
200
150
100
50
0
Layer 4,Reinsurer E
0 25 50 75 100% of Layer