'How installing and running a high quality
hazard instrumentation network can
facilitate the creation of parametric
triggers'
Robert Muir-Wood
OECD 2nd International Cat Risks
Conference
Bangkok, Sept 25th 2009
Bringing Science to the Art of Underwriting™
TM
Agenda
 1st and 2nd generation parametric risk
transfer structures
 Instrumentation requirements
 Role of governments/multilateral agencies
to enable parametric risk transfer
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
2
Investor/Issuer Mismatch - Developed
World
Investors
Issuers
• Prefer indemnity
• Prefer parametric
• Dislike basis risk
• Dislike indemnity
• Settling for industry loss or
modeled loss
• Bias for simplicity
“When they were designing the Cat bond
market, they forgot to invite the investors”
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
3
Investor/Issuer Mismatch - Developing World
Investors
Issuers
• No insurance institutions
to process claims
• Only parametric is
tenable
• No reliable historic claims
• Proportional recovery
better than nothing
For the developing world – it has to be
parametric
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
4
First & Second Generation Parametric

1st generation parametric is based on the parameters of the
event
– ie. earthquake magnitude and location (in a geographic ‘box’)
– Hurricane intensity and track (and distance from the site)

2nd generation parametric is based on measurements of the
hazard at multiple locations
– Eg. peak ground acceleration measurements or peak gust
windspeed recordings
– Weighted by the exposure values and vulnerability in the
vicinity of each recorder, a formula is developed and tuned to
create an index that closely matches loss

Parametric structures require pre-existing Cat model to design
correlation with expected loss and risk analysis for the Bond

Higher basis risk (mismatch with actual losses) likely for 1st
generation than second generation structures
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
5
Caribbean Catastrophe Risk Insurance
Facility – 1st Generation parametric trigger

Launched Feb 2007 to provide participating governments with
immediate liquidity if hit by a hurricane or earthquake.
–
For hurricane - trigger based on ‘calculated’ windspeeds at key exposure
concentrations
• Derived using predefined Rmax of a hurricane
• However real radius can vary by factor of 10
– For earthquake based on magnitude in a box not ground motion on an
island

For a small island – there is the potential for no payout when
significant loss as well as payout when there is no loss

2nd generation parametric not used in the Caribbean (in 2007)
because of lack of suitable pre-existing windspeed and ground motion
instrumentation networks.
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
6
Caribbean Insurance Pool Not Affected by
Hurricane Dean
 INSURANCE JOURNAL

By David McFadden
August 24, 2007

Hurricane Dean will not trigger an insurance pool set up this year by
Caribbean countries and the World Bank that provides emergency cash
to islands in case of natural disaster, officials said this week.

The hurricane, which killed at least 20 people across the region and did
extensive damage to bananas and other crops, failed to surpass wind
speeds and other thresholds to prompt payments from the disaster pool
established in February, according to fund supervisor Simon Young.

Jamaica, which sustained the brunt of Dean's destructive path in the
Caribbean, came close to being hit hard enough to receive payouts
from the Caribbean Catastrophe Risk Insurance Facility.

"Had the storm been 30 miles to the north that would have triggered
immediate payment in Jamaica,'' Young said from the Washington office
of Caribbean Risk Managers Ltd., which oversees the insurance program.
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
Requirements for hazard instrumentation
networks

System must have multiple stations
– To ensure regional coverage (average station spacing 20-30km?)
– To provide redundancy if a station fails

Instruments must be robust and have their own power supplies
– Demonstrably able to withstand impacts and/or loss of power from
a catastrophic event

Maintenance
– Must be maintained by an agency that can demonstrate consistent
standards of battery replacement and regular testing

Independence/Integrity
– Must be run by an agency seen to be completely independent of
potential interference from parties to a financial transaction.
– (Can be a problem for some government organisations.)
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
8
2nd generation Parametric Windstorm Index for
Europe (based on c 300 windspeed measurements)
Lower Basis Risk:

Industry loss estimates can be customised by Line of Business and Province/City
Increased Granularity:

RMS Industry Exposure Database (IED) is at postal code resolution, enhancing the accuracy
of industry loss estimates.
Better Execution:

Increased transparency, simplicity and liquidity for investors translates into better execution.
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
9
Eurowind Index Look-up Table

The relationship between insured industry losses and peak-gust wind speeds are
probabilistically estimated by application of the Europe Windstorm Model to the
Industry Exposure Database

The Index Look-up Table relates an estimated industry loss per 2 figure postcode
to a given wind speed in that postcode for each line of business; in effect
representing a set of weighted average vulnerability curves.
RMS RiskLink
Outputs
Event Rates
Wind speed by Windstorm Calculation
Location and event, averaged to
CRESTA level
Probabilistic Hazard
Module
Industry Exposure
Database
Results
Paradex-EUWS
Index Table
Industry insured loss by Event, with
detail by CRESTA and LOB
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
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Eurowind Index - Historic Performance
Date
Windstorm Name
Region Impacted
Paradex Europe
Windstorm 8.0 Index
Value
Annual Occurrence
Exceedance Probability
of Index Value
25th Jan 1990
Daria
Southern England,
Netherlands, Belgium and
Germany
€12,208bn
1.82%
15th Oct 1987
1987J
Southeast England and
southeast Norway
€5,180bn
6.37%
25th Dec 1999
Lothar
France, Germany,
Switzerland
€6,732bn
4.52%
25th Feb 1990
Vivian
Northern Scotland,
Scandinavia, Belgium
€5,164bn
6.40%
18th Jan 2007
Kyrill
Northern Europe
€3,298bn
10.86%

Daria was the most severe of a series of events that moved into Europe in early 1990. The storm caused
a trail of destruction across southern England (where the highest peak gust wind speeds approached 44
m/s, or 100 mph), the Netherlands, Belgium, and Germany and caused significant insured losses in
Denmark, France and Luxembourg

The index value of this event equates to an annual attachment probability around a “1 in 50 year” event

There have been no examples in recent years of a “1 in 100 year” or “1 in 250 year” event in the
European Region
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
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But existing stations fail during hurricanes
NOAA Station: METAR KORL
Wind Speed (knots)
60
50
40
30
20
10
0
8/11
8/12
8/13
8/14
8/15
8/16
8/17
Time
 Existing stations are often deactivated during hurricanes
 There is “survival bias” – stations that survive are the ones
that experienced weaker winds
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
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Weatherflow Hurricane Network
• Ten-meter concrete poles
• Anemometers rated to 220mph
• Overall station rated to 140mph
• Cellular link with 1Gb flash backup
• Solar powered battery backup
• Secure data transfer and storage
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
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Designing a privately financed windspeed
recording network for Florida
TM
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Earthquake recording in Japan
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
Second Generation Paradex earthquake
zip centroid SA values
ShakeMap
Advanced National
Seismic System
& partner
networks
(interpolate)
zip

SA0.3sec, SA1.0sec, SA3.0sec



Paradex-EQ
Event Bulletin
Initial
set-up /
update
Industry
Loss
ELT by
zip & LoB
Residential
f(0.3sec,
1.0sec,
3.0sec )

zip
index
value

Comml & Ind
f(0.3sec,
1.0sec,
3.0sec )

index
value

pre-compiled index value lookup tables
Res
C&I
parametric
zone industry
loss index

values
(zip < zone < state)
?
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
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New instrumentation
How did they know I dropped
my phone in the bathtub?
How can we know that the
flood was 12 feet deep?
Cap
Discolored
activated
indicators
provide
depth
reading
 Technology in use for
hydrological applications (and
cellphones)
 Require routine servicing
 Low cost (<$500/unit)
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
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Low tech solutions have also been employed
for 2nd generation parametric triggers
 Flood heights can leave a
mark on buildings
 At pre-surveyed locations
 Heights measured within a
few days after ‘event’
 Audited by a highly reputable
survey organisation
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
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What can Governments and MLF Agencies
do to foster parametric risk transfer?

2nd generation parametric triggers provide viable low basis risk
alternatives to insurance - in particular for developing countries

Requires installation of networks of hazard recorders around
concentrations of exposure
– Hazard recorders need to be highly robust and able to record without external
power

Supported by an agency that can ensure the maintenance of the
equipment and guarantee the objectivity of the observations

All organisations/institutions linked with the risk transfer mechanism need
to have demonstrable long term integrity

Underpinned by models to structure and define index risk analysis
However smart instrumentation can promote risk transfer !
TM
© 2006 Risk Management Solutions, Inc.
CONFIDENTIAL
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