Dealing With Risk:
A View From The World Of
Catastrophe Risk Modeling
And Insurance
Richard J. Murnane
RPI/BIOS and Baseline Management Company, Inc.
8 June, 2010
MtnClim 2010
(Hurricane Fabian over Bermuda. Sept. 5, 2003.)
RPI Corporate Sponsors
• State Farm
• Renaissance
Reinsurance
Corporation
• XL Re Ltd.
• Aspen
Insurance
• Axis Specialty
• PartnerRe
• Risk
Management
Solutions
• Platinum
Underwriters
• Amlin
Underwriting
• FlagstoneRe
• Nephila Capital
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
US and Europe have ~75% of global premium: ~$1.8 trillion
Swiss Re, Sigma 3/2009
US Hurricane Insured Losses
125
100
75
50
125
100
75
50
25
25
0
1900
Normalized Losses
Billions US$ (2005)
Billions US$ (2005)
Losses For Year Of Occurrence
1920
1940
1960
Year
After Pielke et al., 2006
1980
2000
0
1900
1920
1940
1960
Year
1980
2000
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
Insurance And Reinsurance
Event Frequency
Primary Insurer’s Retention
Reinsurance Layer 1
Reinsurance Layer 2
Reinsurance Layer 3
Reinsurance Layer 4
Primary
Insurer’s
Retention
Event Intensity
How Do (Re)Insurers:
• Assess their risk?
– Catastrophe Risk Models provide the
“technical price”.
Catastrophe Risk Model
Hazard
Exposure
Probability
Location
Magnitude
Duration
Location
Construction
Age
Occupancy
Damage
Physical Damage
Repair Costs
Insured Loss
Terms of Coverage
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
Sea Surface Temperature
Power Dissipation Index
Changes In Hurricane Power?
“… 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 hurricanerelated losses in the
twenty-first century.”
Year
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.
Future Unfavorable Conditions?
“… 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 …”
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 Knowledge
IPCC, 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 Perspective
December, 1999: Anatol, Lothar, and Martin
Anatol
Also, Benfield, Swiss Re,
RMS (and others?)
Lothar
Martin
ERC Frankona
Munich Re
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
Piper Alpha, 1988 - $3.6 billion
Swiss Re Sigma, 1/2010
Deepwater Horizon MODU
April 20
Types Of Offshore Modeled Losses
•
•
•
•
•
•
Physical damage
Operator extra expenses
Well control
Debris removal
Business Interruption
Contingent business interruption
Climate Change And
Offshore 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
Deepwater Horizon
Offshore structures: >4000
Length of pipeline: >56,000 km
Property Value: ~$150 Billion
MMS, 2008
MMS, 2008
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 Program
Millions of $US
300
Primary Insurer
250
Layer 4,
Layer 4,
Reinsurer D Reinsurer E
200
150
Layer 3, Reinsurer C
100
Layer 2, Reinsurer B
Layer 1, Reinsurer A
50
Primary Insurer
0
0
25
50
% of Layer
75
100