Flood risk is poorly modeled at a global level, particularly in developing countries where flooding is a regular occurrence.
A new briefing has been published with the purpose of informing Guy Carpenter’s approach to hurricane risk in the context of new scientific findings.
Floods are among the most destructive hazards and as more people move to urban areas, flooding is having a growing impact on larger populations and economic losses.
Here we review recent GC Capital Ideas stories that have touched on issues relating to the Solvency II regime.
Here we highlight recent GC Capital Ideas stories authored by Andrew Cox, Head of Advisory, EMEA, at Guy Carpenter.
Guy Carpenter today announced the release of MetaRisk® 7.1, the latest version of the firm’s premier risk and capital management decision making tool. The platform offers access to a variety of new features and enhancements that will improve usability, increase overall functionality and enable the development of more accurate and efficient risk and capital models.
John Major, Director of Actuarial Research, GC Analytics®
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Here we repeat our popular series authored by John Major, which focuses on the issues and challenges in managing catastrophe model uncertainty.
Managing Catastrophe Model Uncertainty, Issues and Challenges: Part I, Executive Summary: Uncertainty is ever present in the insurance business, and despite relentless enhancements in data gathering and processing power, it is still a large factor in risk modeling and assessment. This realization, driven home by model changes and recent unexpected natural catastrophes, can be disconcerting - even frightening - to industry participants. But companies that understand the vagaries of model uncertainty and take a disciplined, holistic approach to managing the catastrophe modeling process are well positioned to adapt and outperform the competition.
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Managing Catastrophe Model Uncertainty, Issues and Challenges: Part II, Natural Cat Modeling, Uncertainty in Cat Model Results: Computerized simulation modeling of the potential impact and risk of natural disasters - from multiple perils - was pioneered by Dr. Don G. Friedman at the Travelers Insurance Company in the 1960s. Figure 2, below, is an example of one of his simulated wind speed maps, circa 1974. In 1987, Karen Clark founded the first cat modeling firm, AIR, and three more firms, RMS, EQECAT and ARA, came on the scene in 1988, 1994 and 1999, respectively. By the early 1990s Guy Carpenter had become a “power user” of cat models and augmented its capabilities by acquiring the intellectual property - and hiring some colleagues of the retiring Dr. Friedman.
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Managing Catastrophe Model Uncertainty, Issues and Challenges: Part III, Using Cat Models: Scenario analysis has a long history in risk management. By examining a set of hypothetical extreme events and asking “what if this were to happen?” management can begin to get a sense of vulnerabilities in the business. But it is hard to assess how realistic a particular scenario might be. Using historical events as the basis for scenarios incorporates the fact that those events did, in fact, occur. They are realistic by definition. And their relative occurrence over time gives a sense of probability.
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Managing Catastrophe Model Uncertainty, Issues and Challenges: Part IV, How Guy Carpenter Can Help: As Karen Clark, founder of AIR and now an independent consultant, has said, “the black box started out as a useful tool for decision making, but then it grew to be very big and very powerful; the black box now makes the decisions.” While somewhat hyperbolic, there is also much truth to this aphorism. Models are tools, and a good tool user understands the strengths and limitations of the tool.
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Click here to view other GC Capital Ideas stories authored by John Major >>
GC Capital Ideas has published several stories recently on emerging markets and how pursuit of them may contribute to profitable growth. We highlight several of the articles here.
How Guy Carpenter Can Help: Catastrophe Risks in Developing Economies: Guy Carpenter is uniquely positioned to help clients successfully grow their business in emerging markets. Our GC Global Analytics and Advisory team offers services and solutions that include industry-leading risk analytics, strategic and technical advice and capital advisory.
Increased Flood Loss Potential: Making use of all available tools and practicing comprehensive exposure management will both strengthen (re)insurers’ ERM practices and allow them to make informed risk management and reinsurance decisions as they enter new markets. Certainly, flood risk is prevalent and increasing in almost every developing economy. Recent studies by Swiss Re and the Organisation of Economic Co-operation and Development suggest flood loss potential will grow as emerging economies continue to prosper.
Flood Risks in Emerging Markets: Despite such important model limitations for earthquakes, the lack of modeling solutions for flood risks poses an even greater threat to (re)insurers. As illustrated by Figure 7 below, flood risk is poorly modeled at a global level by the three main modeling companies, particularly in developing countries where flooding is a regular occurrence.
Catastrophe Models: Implications of Emerging Market Growth on the (Re)insurance Sector: Natural disaster risk assessment relies on probabilistic catastrophe models and historical data. The three main catastrophe modeling companies, AIR Worldwide, EQECAT and Risk Management Solutions, have therefore traditionally created modeling solutions for perils and territories considered to be peak risks. Although each modeling company has in recent years launched products for countries outside the more established markets of the United States and Western Europe, several gaps in coverage remain, particularly in emerging markets.
Implications of Emerging Market Growth: ERM: Although improvements in ERM practices meant (re)insurers were better prepared for the major catastrophes of 2010 and 2011 than those in 2005, the global nature of these losses has prompted some companies to review their perception of risk. This international loss trend, along with insurance growth in emerging market regions, is driving the need for better and more comprehensive tools for modeling risk.
Click here to read additional stories about emerging markets >>
David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President, Lucy Dalimonte, Senior Vice President, Ellen Rieder, Managing Director and Emma Karhan, Senior Vice President
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RMS released an updated Probabilistic Terrorism Model (PTM) in July 2012, version 3.1.2. The new model revised the annual frequency of a terrorism attack on U.S. soil. No updates were made to geographies outside the United States.
David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President, Lucy Dalimonte, Senior Vice President, Ellen Rieder, Managing Director and Emma Karhan, Senior Vice President
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AIR implemented significant model updates in version 13 of CLASIC/2TM, released in 2011. The updates impacted hazard components such as the target and landmark database, event frequency estimates and exposure and policy conditions.
