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									    Natural Catastrophe Risk Insurance Mechanisms                      ON THE BUILDING BLOCKS OF CATASTROPHE
    for Asia and the Pacific                                                                       INSURANCE
    4–5 November 2008                                                                — With Relevance to the Asia-Pacific Region
    Tokyo, Japan
    Conference supported by the Asian Development Bank                                            Robert Muir-Wood1
    and the Ministry of Finance, Government of Japan                                   Risk Management Solutions Ltd.

                                                 S U M M A R Y
◉     Catastrophe “CAT” models are fundamental to catastrophe risk management including risk pricing,
      risk transfer structuring, insurer capital adequacy and risk securitization (either through parametric or
      loss based triggers).

◉     The CAT model sets out to create a “universe” of all possible events along with their areas of impact
      (footprint), and the vulnerability of property, people or other assets in the path of the catastrophe.

◉     The standard output of the CAT model is the exceedance probability “EP” relationship (showing the
      annual likelihood of a loss being in excess of some magnitude) and its integral—the “average
      annualized loss” or technical rate for the risk.

◉     The development of CAT models has become increasingly technically sophisticated. However, while
      the essential architecture of the model is simple—and there are open source CAT models—the
      challenges come through relating the localized hazards to the specific vulnerabilities.

◉     CAT model results are extremely sensitive which is why it is easy to build a bad model. For example,
      a 1% variation in windspeed (in a hurricane model) makes a 7% variation in loss. A 1m difference in
      elevation of a property may typically make a 50% difference in the technical rate for flood risk. In
      developing a new commercial CAT model, the period of research and iterative calibration takes much
      longer than actually assembling the model.

◉     While a horizontal resolution of 1km–5km might be appropriate for an earthquake CAT model (except
      in relation to landslide and liquefaction risks), a flood CAT model will require horizontal resolution of
      100m or better and vertical resolution no worse than 50cm.

◉     For the Asia Pacific region, flood is the principal hazard, along with earthquake and typhoon wind. In
      modeling typhoon impacts, it is important to model the wind, storm surge and inland flood perils
      separately as they will have very different microzonation characteristics.

◉     For modeling the risk to megacities, high resolution data is required for land elevations, the locations
      and vulnerabilities of all properties and infrastructure, river channels and flood defenses, as well as
      the characteristics of catchment run-off (and for coastal cities—storm surges).

◉     In expanding the creation of CAT models for the developing world, it is important not to compromise
      on model resolution or the quality of the research and calibration. From the widespread availability of
      Digital Terrain Models and the creation of GoogleEarth—there are many new tools that can assist in
      efficiently developing good quality models.

◉     Given the lack of any agency that vets the quality of CAT models, the transparency of the Florida
      Hurricane Commission process remains the only way in which to check how different modelers build
      and calibrate their models.

    The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of the
    Asian Development Bank (ADB), or its Board of Governors, or the governments they represent. ADB does not guarantee
    the accuracy of the data included in this paper and accepts no responsibility for any consequence of their use. Terminology
    used may not necessarily be consistent with ADB official terms.

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