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					Catastrophe Risk:
Assessment and Management

George Attard
11th April 2012
Agenda

ChallengesFacingTheIndustry
CatastropheManagement
BlackSwans
LookingAhead




                               2
                            accident aces         agents    america asia balance                              better   billion

        business businesses                                                       capabilities             capital casualty             china
        clients combined                   commercial      countries    credit         crisis   customers              distribution europe

            evan                example                                                                                              great
                      fact financial focus frankly general global good
             greenberg grow growing growth important                                                 ill                   infrastructure


           insurance international investment largest latin life lines
          local management market markets                      needs                                         middle           officer operating

               operations    opportunities opportunity                                     particularly    personal         portfolio

         premium            presence pricing probably       product               products property                              question

            rate   reinsurance             risk          sales second         services side significant slide small        specialty
              terms        terrific travel underwriters      underwriting value                            while   world   years
Tag Cloud Word Frequency – Ace Q1 2010 Earnings Call; Aon Benfield Analysis

                                                                              3    3
What Is On Investor’s and Management’s Minds?
Public Document Word Frequency
                        Frequency per 1000 Words
                    0        1          2          3       4
                                                               Selected word frequency
        capital
                                                               thirteen selected 10Ks,
 reinsurance                                                   quarterly conference call
            risk
        growth                                                 and investor presentation
           price
        pricing                                                transcripts, H1 2010
         return
     specialty
  opportunity                                                  Ace, Allstate, Axis, Chubb,
         global
    asbestos                                                   CNA, Hartford, Markel,
  competitive
 catastrophe
                                                               Progressive, Ren Re,
          focus                                                Travelers, W.R. Berkley, XL
       reserve
     currency
          crisis
          china
 government
  competition
           profit
  repurchase
        health
    discipline
      inflation
       political
   regulation


                                                       4
Management Focus – 1st Half 2010

                 • Capital management #1 challenge for industry –
Capital            RBC!


Reinsurance      • Volatility transfer, capital & capacity



Risk             • ERM, Rating agency, regulator, investor



Growth           • Product enhancement & differentiation


                 • Tariff, flexibility, competitive pressures and
Price              growth objectives


                           5
Management Focus – 2011

Catastrophe     • Australia, New Zealand, Japan, Thailand



Risk            • ERM, Rating agency, regulator, investor


                • Capital management was #1 challenge for
Capital           industry!


Growth          • Product enhancement & differentiation


                • Tariff, flexibility, competitive pressures and
Price             growth objectives


                          6
        Timeline of 2011 Industry Events
         2011wasaneventfulyearwithelevatedcatastrophelosses,volatilestockmarket
           conditions,recordlowinvestmentyieldsanddowngradeofU.S.debtandthe
           European sovereign debt crisis

                                                         Joplin Tornado                                         10yr Treasury yield
New Zealand                 Japan Earthquake               Outbreak ~                                            hits historical low
                                                              $6.5B                                                                        A.M. Best places
 Earthquake                   and Tsunami                                                                             (1.72%)
                                ~ $23.5B                                                      TX Wildfires                                    Euro groups
  ~ $13.5B                                                                S&P                   ~ $.5B                                       "under review"
                                                                      downgrades US
                                                                          debt


       Jan              Feb            Mar       Apr     May        Jun         Jul         Aug      Sep       Oct       Nov       Dec
                                                                                                                 Snowstorm
  Winter storms hit                                                       Hurricane Irene
                                             Birmingham Tornado                                                 hits northeast
 Midwest & Northeast                                                         ~ $4.3B
                                                   Outbreak                                                         ~ $.6B                S&P warns of
      ~ $1.0B
                                                   ~ $7.3B                                                                               downgrades for
                                                                                                         S&P 500 down                    15 Euro nations
                                                                                 Thailand Floods         19% from 2011
                                                                                     ~ $10B                  peak




      Source: Aon Benfield Analytics


                                                                                  7
           Impact Forecasting Economic Loss Estimates
            Globallossesfor2011arecurrentlyestimatedatUSD435billion
            500
                                           Winter Weather

            450                            Wind
                                           Wildfires
            400                            Tropical Cyclone
                                           Severe Weather
            350
                                           Other
            300                            Hurricane/Typhoon
                                           Flood
Billions




            250
                                           Earthquake
            200

            150

            100

             50

              -
                           2004     2005   2006         2007       2008   2009   2010   2011

       Source: Impact Forecasting



                                                               8
2011 Economic Loss versus Average
 LossesinAsiaaloneaccountedfor65percentoftotallossesfor2011,morethan
   sixtimestheaverageannualeconomiclossinthatregioninrecentyears
 Higherinsurancepenetrationintheregionswithlossin2011increasedtotalloss
   covered by insurance to approximately 25 percent (USD 107 billion), up from 15
   percent in 2010.
                  $300
                                                                        Source: Impact Forecasting


                  $250

                                                              Average 2004-2010        2011
                  $200



                  $150
       Billions




                  $100



                  $50



                    $0
                         Africa   Asia   Europe     North     Oceania    South              US
                                                  America               America
                                                  (excl US)
                                                      9
       Top 10 Insured Loss Events in 2011




Source: Impact Forecasting




                               10
        Top 10 Human Fatality Events in 2011




Source: Impact Forecasting




                               11
        Top 10 Structural Damage Claim Events in 2011




Source: Impact Forecasting




                               12
Total Economic and Insured Losses in 2011
 Thecostliestindividualglobaleconomiceventsbynaturaldisastertypein2011were:
     Earthquake:Japan(March11)—USD210billion
     Flooding:Thailand(July-November)—USD45billion
     SevereWeather:UnitedStates(April22-28)—USD10.2billion
     TropicalCyclone:UnitedStates,Bahamas,CaribbeanIslands(August22-30)—USD8.55
         billion
     WinterWeather:UnitedStates(October28-30)—USD3billion
     Drought/Wildfires:UnitedStates(January–December)—USD10billion




                                                                  Source: Impact Forecasting


                                           13
Challenges in Our Region


                            Data Limitations



          Market
       Concentration:
         Developed vs                             Sophistication
          Emerging
        Consolidated vs
         Fragmented




                    Impact of             Impact of Rating
                   Regulators                Agencies



                                     14
Agenda

ChallengesFacingTheIndustry
CatastropheManagement
BlackSwans
LookingAhead




                               15
Look beyond simply transferring risk



                                  Measure



ERM                      Manage


                                        Monitor




                        16
Catastrophe Management

                                 (Re)insurance
                                  Structuring

                                                  Accumulation
               Pricing
                                                     Control




                              Catastrophe
        Underwriting
                              Management                  Capital
                                                        Management




                                              Rating
                         Regulators
                                             Agencies



                                       17
Modelled Catastrophe Perils by Territory
                             Earthquake
                              AvailableinallmainEQterritories.

                             Typhoon
                              Typhoonmodelsexist whichincorporate
                                typhooninducedfloodingbutnomonsoonal
                                floodmodels.Typhoonisjustasecondaryperil
                                comparedwithmonsoonalfloodinmany
                                territories.

                             Pakistanisexposedtoavarietyofnatural
                             disasters,includingearthquakes,tsunamis,
                             landslides,cyclones,butthemostdamagingand
                             themostfrequentofthenaturalperilsfacingthe
                             countryisflood.

                             Regionally, earthquakeisthePMLdriverinthis
                             region.Howeverotherperilsmayoccurmore
                             regularlyanddrivethehigherfrequencypartof
                             thelosscurve-suchasfloodingandconvectional
                             windstorm.
                        18
       Pakistan – 10 largest Natural Disasters




Source: OFDA/CRED



                                19
       Pakistan - Flood




Source: OFDA/CRED



                          20
2010 Pakistan Flood

 Resultedfromheavymonsoonrains
   andaffectedtheIndusRiverbasin

 Approximatelyone-fifthofPakistan's
   totallandareawasunderwater

 About20millionpeoplewereaffected
   and2,000peopledied

 Hascostmorethan5.3millionjobs


 Totaleconomic loss USD 43 billion




                                       21
   Pakistan – Major Perils




TheinformationpresentedhereistakenfromEM-DAT:TheOFDA/CREDInternationalDisaster
  Database. Inorderforadisastertobeenteredintothedatabaseatleastoneofthefollowingcriteria
  hastobefulfilled
      10ormorepeoplereportedkilled
      100peoplereportedaffected
      acallforinternationalassistance
      Declarationofastateofemergency



                                                 22
Other Considerations
Data Quality

Inputdataqualitydeterminedbycompletenessandcorrectnessofdatausedin
  analysis
Location:resolutionofAddresses(thefinerthebetter)-impactshazardintensity
 calculatedatsite
  Finest                                                                Coarsest
  Latitude/Longitude   Street Address Postcode   Sub-CRESTA   CRESTA



InsuredValuebyCoverage: Building,Contents,BI–impactsloss
BuildingCharacteristics:Constructiontype,Numberofstoreys,etc–impacts
 damageabilityandthereforeloss
PolicyConditions:deductibles,co-insurance,limits–impactslossprojectionsto
 financial structures
 Any unspecified value may result in non-inclusion of risk or use of default values
  that may not reflect portfolio being modelled

                                                   23
Other Considerations
Model Miss

ModelMiss-Differencebetweenactualand
  modelledloss
                                                     Modeled Loss
 Noticedduringbenchmarkingofindividual                                   Actual Loss
  events
Nocatmodelisabletofullyreproducea
  historical loss
                                                  Model inaccuracies
      Modelsdifferfromreality                         -hazard
                                                    -vulnerability
     Scienceofperilsnotfullyestablished,
                                                 Modelling assumptions
       requirecertainassumptionswhich
       couldvary                                  Risk Concentrations
     Distributionofpossibledamagenota
                                                 Missing or undervalued
       point loss                                      exposures
 Law of Large Numbers applies – run enough        Unmodelled Perils
  events and on average the cat model will
                                                    Demand surge
  converge towards reality

                                            24
Other Considerations
More than just the Core Peril
                                     Nuclear Power Meltdown                          Fire




                                           Source: Digitalglobe                  Source: Alertnet


                         Flooding                       Liquefaction                 Landslides
 Earthquake

                 Source: earthquakejapan2011     Source: earthquakejapan2011


                                                Tsunami

                                                                               Source: earthquakejapan2011



                                       Source: earthquakejapan2011

                                           25
Other Considerations
Non-Modelled Perils

Unmodelledperilsthatmayhavepotentialtocausetotalbuildinglosstolarge
 numbers of properties:
     Firefollowingearthquake(FFE)
     Tsunami
     FloodingfromEQ-triggeredfailureofman-madedam
     FloodingfromEQ-triggeredfailureofnaturaldamformedbyanymeans
     Floodfromtropicalcyclones




                                        26
Other Considerations
Non-Modelled Perils

ConsiderlossesthathaveoccurredintheAsianRegionrecently
     JapanEarthquake–considerablelossfromTsunamifollowinglosswhichis
       unmodelled
     AustralianFloods–notpartofformalCatModellingsuite
     NZEarthquake–hitanareanotthoughttobeonafault,subsequentlyfound
       tobeonthree.
     ThailandFloods–noformalmodelsavailable
Un-modelledperilsand“non-peakterritories”willattractfarmoreattentionthan
 inpreviousyears




                                         27
Lessons Learned from Observed Events
 Losseventsin2011broughtinterestingtestsofcoverage,deductibles,
   policyholderco-participationsandgovernment/privateinsurerpartnerships
     Event            Issue Observed            Event Coverage                                        Issues to Consider
Japan             Overwhelming debris       No coverage for debris      Large scale debris removal operations in many nations will require a
 Earthquake       created by tsunami        removal by Japanese         coordination of the insurance policy coverage for debris with the need for
 and Tsunami                                insurers                    extensive government involvement in the debris removal process.
                  Minority of homes and     Banks do not require        The impact on communities that did not have sufficient insurance was clear
                  businesses purchased      earthquake insurance in     in New Orleans after Hurricane Katrina and it is clearly going to be an issue
                  earthquake insurance      Japan                       in Japan. Insurers and reinsurers have capacity to provide more coverage
                                                                        should governments recognize the inadequacy of banking policies. These
                                                                        policies place undue catastrophe burdens on financial systems and
                                                                        consequently destroy communities when the known catastrophic risks
                                                                        eventually occur.
                  50% co-participations     Coverage for earthquake While a 50% co-participation is substantially larger than the deductibles in
                  for all homeowners        in Japan is viewed as       place in most other nations there appear to be no signs of policyholder
                                            financial assistance after unrest with this form of coverage. Would co-participations be more useful to
                                            an event rather than        policyholders than large deductibles? Would insurance take-up rates
                                            indemnity coverage          improve if co-participations were used rather than deductibles?
New Zealand       Severe liquefaction       Government underlying       Liquefaction can affect very large areas and the decisions about relocating
 Earthquake and   combined with low         and private insurer         homes and businesses are made by governments, not private insurers.
 Liquefaction     levels of shake related   excess coverage             Insurers may need to reconsider whether excess coverage can include
                  damage to homes and       combine to insure           coverage for government requirements to relocate homes.
                  businesses                homes and businesses
United States     Nature's most powerful    Tornado and hail losses Very high level of damage can occur as a percentage of total insured values.
 Tornado and      winds affecting high      are covered under           Some of the highest levels of insured damage to insured values ever
 Hail             concentrations of         substantially all property observed in tornado and hail losses occurred in these events. Concentration
 Missouri and     insured values            policies                    risk is real everywhere. Some of the debris removal coordination issues
 Alabama                                                                mentioned above were also revealed in these events.
United States     Non-uniform               Varying deductibles         Consistency of deductibles may be more important than previously
 Hurricane        deductibles required or   state to state and          considered and the pressure from individual state insurance regulators for
 Irene            allowed in multiple       coastal versus inland in    extra contractual allowances to policyholders may have been
                  states affected by the    the same state              underappreciated.
                  same event

                                                                                                                             Source: Aon Benfield Analytics

                                                                            28
Agenda

ChallengesFacingTheIndustry
CatastropheManagement
BlackSwans
LookingAhead




                               29
Black Swans

 TheorypopularizedbyNassimNicholasTaleb

 BlackSwanevent:
     isanoutlierasitliesoutsidetherealmofregularexpectations,
     carriesanextremeimpact,and
     makesitexplainableandpredictableretrospectively.

 Typically,fallsundertheriskcategory‘UnknownUnknowns’

 Theycananddooccuronaregularbasisandlikelytobecomemorecommon




                                          30
Black Swans

 Theoccurrenceofblackswanscan,andrepeatedlydoes,overwhelmtheinsurance
   industry

 Leftunattended,blackswanscanthreatenacompany’sveryexistence

 Ratingagencies,investorsandincreasinglyregulatorsarelesslikelytoprovide
   favorableopinionswheninsurersfailtodemonstrateemergingriskmanagement
   processes

      “Itisnotthestrongestofthespeciesthatsurvive,northemostintelligent,
                       buttheonemostresponsivetochange”




                                          31
1816 - “The Year Without a Summer”
 InApril1815,MountTamboraontheislandofSumbawa,Indonesiaerupted
 Greatesteruptioninrecordedhistory
 Explosionheard>2,000kmaway




                                                            The estimated volcanic ash fall
                                                              during the 1815 eruption




                                     32
1816 - “The Year Without a Summer”
Local and Global Impact

 LocalImpact:
     Darknesswithin600kmradiusfor1-2days
     About10,000peoplediedonSumbawaand80,000duetofamineanddisease
       inthesurroundingregions
     Massivecropfailureledtofamine;ittookuptofiveyearsforvegetationto
       return400kmaroundTambora

 GlobalImpact:the“YearwithoutaSummer”:
     Sunlightwasblockedbyacidaerosols,ledtoglobalcoolingandworldwide
       harvest failure
     RainswereinterruptedinIndia,leadingtodeadlyCholeraoutbreak
     CropsfailedinEurope
     FloodsoccurredinChina
     SnowfellinnortheastUSinJune



                                        33
Volcanic Eruption
Effect of a Year Without a Summer Today?




  Upper level atmospheric map from
                                                       Russian Heat
   late July and early August 2011
                                                          Wave
     showing an ‘omega block’ in
            western Russia




        Food prices
         spike, help                       Contributes to doubling of
       trigger unrest                             wheat price

                                     34
1908 Tunguska Explosion

 On30June1908inTunguska,Russia,the
   mostpowerfulnaturalexplosioninrecent
   history rocked the earth

 Believedtobeanairburstofameteorite6-10
   kmabovetheearth’ssurface                    An area of 2150 square kilometres and
                                                about 80 million trees were destroyed

 Explosionwas1,000timesmorepowerful
   thantheatomicbombdroppedonHiroshima

 20,000NearEarthObjectsofconcern

                                               The event occurred in a remote part of
                                                         Siberia in Russia




                                          35
1908 Tunguska Explosion – Today

 Thegraphicshowsthe1908Tunguska
   eventoverlaidoverManhattanwith
   estimated property losses of $1.19 trillion
   (RMS 2009)




                                            36
1918-1919 Influenza Pandemic




   The pandemic was caused by a form of influenza that probably originated due to army barrack conditions
                                            during World War I


                                                    37
1918-1919 Influenza Pandemic
Effects




 FirstreportedcasesinFortRiley,Kansas-January1918
 Withinweeks1,127soldierswereinfectedand46diedasvirusspreadacrossthe
   US
 ThefluappearedinFranceinAugust1918,spreadingEastandSouthtoRussia,
   Africa,andeventuallytoChinaandJapan
 27%ofglobalpopulationinfected,killing3%-6%,makingitdeadlierthanWorld
   WarI

                                        38
A Pandemic Today

 Estimatesoftheeconomicimpactofasimilar
   epidemictoday:
     175–350milliondeaths
     GDPreducedby$2trillion

 Improvementssince1918:
     Bettermedicaltechnology(e.g.antibiotics)
     PlanningduetoSARSandbirdfluscare

 Additionalcomplexitysince1918:
     Internationalairtravel
     Moderncities
     Moreinterdependentandvulnerablesociety
        (e.g.commuting)



                                          39
2011 Tohoku Earthquake

 Atotallyunforeseeableevent-aseismological“blackswan”

 TheJapanTrenchwasnotexpectedtogeneratequakesabovemagnitude8.0

 Asurprisetocatastropheriskmodelers

 M9.0earthquakeandtsunamicausedanucleardisaster,persistent
  powershortages,andahostofothermajorsocietalandeconomic
  challenges




                                        40
2011 Tohoku Earthquake – really a Black Swan?

                     Hazard/EventvsConsequences

                     StoneTabletswereremnantsofpriortsumanis.

                     Hundredsofsuchmarkersdotthecoastline,some
                       morethan600yearsold.Collectivelytheyforma
                       crudewarningsystemforJapan–inscriptions
                       included:

                         Highdwellingsarethepeaceandharmonyof
                            ourdescendants“
                         "Rememberthecalamityofthegreat
                            tsunamis.Donotbuildanyhomesbelowthis
                            point.“
                         "Ifanearthquakecomes,bewareof
                            tsunamis"

                         41
Agenda

ChallengesFacingTheIndustry
CatastropheManagement
BlackSwans
LookingAhead




                               42
Factors to Consider
 Climatechangeand/orsocio-economicchange:
      Population
      Urbanization
      Landuse
      Demographic
      Economic

 Increasinglycomplexandinterdependentsociety
     Communicationsandtheinternet
     Globalizedsupplychains
     Airtravel
     Urbanization

 Interactionwitheconomicandnon-insuranceenvironments
     Unforeseenexposures,perilcorrelation,dominos

                                       43
Preparing for the ‘unforeseen’
 Whatyoudon’tknowisfarmorerelevantthanwhatyoudoknow

 Youcan'tprepareforaspecificevent,butyoucanpreparefortheimpact

 Improvementsincatmodelstocapturetheblackswans
     Focusonrobustnessofmodelratherthanaccuracyofforecasts
     Focusonuncertaintyinresultsratherthanmean
     Focusontailratherthanbodyoflossdistribution

 “what-if”and“as-if”analyses
     Statisticalanalysiscanbeoflimitedvalueandre/insurersneedscenarioplanning
        (RDS)
     Realisticdisasterscenarios(RDS)
     Historicaleventsiftheyweretooccurintoday’ssocio-economicenvironment

 Understandingeconomiclinkagesanddominos

                                            44
A Final Note

 Enoughemphasiscannotbeputontheexposuredata

 Intheend,datawilldeterminetherelevanceofthecatastropheanalysis.


     "All discussions of catastrophic exposure management begin with the
     accuracy and availability of the exposure data. The most sophisticated,
     complex catastrophe modeling systems cannot estimate an insurer’s
     losses if the insurer cannot identify what insurance coverages have been
     written and where those risks are located.”


Source: Measuring and Managing Catastrophe Risk (1995) Kozlowski &Mathewson, CAS.




                                                           45
Thank You

George Attard, BEc FIAA
Managing Director
Analytics

Aon Benfield Asia
80 Raffles Place
#42-01 UOB Plaza 1
Singapore 048624

t +65.6239.8739
m +65.8268.6810
george.attard@aonbenfield.com
aonbenfield.com




                                46

				
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