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Catastrophe Modeling Boot Camp

Catastrophe Modeling Boot Camp. Jim Maher, FCAS MAAA Platinum Re. Cat Modeling. Basic Elements of Cat Models Similarities/Differences of Cat Models Data/Modeling Issues Portfolio Management. Basic Elements of Cat Models. Hazard Module Engineering Module (aka Vulnerability)

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Catastrophe Modeling Boot Camp

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  1. Catastrophe Modeling Boot Camp Jim Maher, FCAS MAAA Platinum Re CAS Reins. Boot Camp, 7/28/05

  2. Cat Modeling • Basic Elements of Cat Models • Similarities/Differences of Cat Models • Data/Modeling Issues • Portfolio Management CAS Reins. Boot Camp, 7/28/05

  3. Basic Elements of Cat Models • Hazard Module • Engineering Module (aka Vulnerability) • Insurance (aka Financial) Module • Event Set (and Year Set) CAS Reins. Boot Camp, 7/28/05

  4. Hazard Module • Seismology • Meteorology • Terrorism • Non random frequency • Non random severity CAS Reins. Boot Camp, 7/28/05

  5. Non-modeled perils • Tsunami • Meteor strike • Est. RP of 1,000 years for 10 megaton event • Most recent Siberia (1908) • River Flood • Wildfire • Winterstorm CAS Reins. Boot Camp, 7/28/05

  6. Non-modeled coverages • Life/Health • Personal Accident • Group Life • Disability • Marine • Yachts • Offshore Oil Rigs • Cargo CAS Reins. Boot Camp, 7/28/05

  7. Earthquake • Major Types of Earthquake • Location of Earthquake Hazard • Major Historical US Earthquakes • Recent US Earthquakes • Vulnerability and Financial Models • Earthquake prediction (?) CAS Reins. Boot Camp, 7/28/05

  8. Major Types of Earthquakes • Strike-Slip • Rock on one side of fault slides horizontally • San Andreas Fault • Dip-Slip (subduction) • Fault is at an angle to the surface of the earth • Movement of the rock is up or down • Great Kanto Earthquake (Japan 1923) CAS Reins. Boot Camp, 7/28/05

  9. Location of Earthquakes • Plate Boundaries • 90% of worlds earthquakes occur here • Seven Major Crustal Plates on the Earth • Rocks usually weaker, yield more to stress than Examples: California, Japan, etc. • Ring of Fire • Intra-plate Earthquakes • New Madrid (1812) • Newcastle, Australia (1989) • Charleston (1886) CAS Reins. Boot Camp, 7/28/05

  10. Plate Boundaries & “Ring of Fire” CAS Reins. Boot Camp, 7/28/05

  11. CAS Reins. Boot Camp, 7/28/05

  12. Modified Mercalli Scale • IV Felt by many indoors but by few outdoors. Moderate • V Felt by almost all. Many awakened. Unstable objects moved. • VI Felt by all. Heavy objects moved. Alarm. Strong. • VII General alarm. Weak buildings considerably damaged. Very strong. • VIII Damage general except in proofed buildings. Heavy objects overturned. CAS Reins. Boot Camp, 7/28/05

  13. Modified Mercalli ctd. • IX Buildings shifted from foundations, collapse, ground cracks. Highly destructive. • X Masonry buildings destroyed, rails bent, serious ground fissures. Devastating. • XI Few if any structures left standing. Bridges down. Rails twisted. Catastrophic. • XII Damage total. Vibrations distort vision. Objects thrown in air. Major catastrophe. CAS Reins. Boot Camp, 7/28/05

  14. Major Historical US Quakes • San Francisco (1906) • Magnitude 7.8, 3000 deaths • Significant fire following element • Charleston (1886) • Magnitude 7.3, 100 deaths • New Madrid (1811/12) • 12/16/1811 Northeast Arkansas • 1/23/1812 & 2/7/1812 New Madrid, Missouri • Estimated Magnitude 8.0 • Destroyed New Madrid, severe damage in St. Louis, rang church bells in Boston CAS Reins. Boot Camp, 7/28/05

  15. CAS Reins. Boot Camp, 7/28/05

  16. Recent US Earthquakes • Loma Prieta (1989) • Northridge (1994) • Nisqually/ (Seattle) (2001) CAS Reins. Boot Camp, 7/28/05

  17. Loma Prieta (1989) • Magnitude 6.9 on San Andreas Fault • Largest since 1906 earthquake • 63 deaths, 3,757 injuries, $6 BN economic damage, $1.0 BN insured damage • Severe property damage in Oakland and San Francisco • Collapse of Highways, viaducts CAS Reins. Boot Camp, 7/28/05

  18. Loma Prieta ctd. • Liquefaction • San Francisco’s Marina district • loosely consolidated, water saturated soils. • Loosely consolidated soils tend to amplify shaking and increase structural damage. • Water saturated soils compound the problem due to their susceptibility to liquefaction and corresponding loss of bearing strength. • Unreinforced masonry construction • Engineered buildings performed well CAS Reins. Boot Camp, 7/28/05

  19. Northridge (1994) • Magnitude 6.8 earthquake • Occurred on previously unknown fault • 60 killed, 7,000 injured, 20,000 homeless, 40,000 buildings damaged • $15 BN insured damage, $44 BN economic • Fires caused damage in San Fernando Valley, Malibu, Venice • Liquefaction at Simi Valley CAS Reins. Boot Camp, 7/28/05

  20. CAS Reins. Boot Camp, 7/28/05

  21. Northridge-PCS Estimates CAS Reins. Boot Camp, 7/28/05

  22. Nisqually/(Seattle) (2001) • Magnitude 6.8, 400 people injured • Major damage in Seattle-Tacoma area • Insured Damage $305 Million • Max. intensity VIII in Pioneer Square area • Landslides in the Tacoma area • Liquefaction and sand blows CAS Reins. Boot Camp, 7/28/05

  23. Earthquake vulnerability factors • Building construction • Unreinforced masonry vs. seismic designed • Building height • Taller buildings vulnerable to long-period waves • Soft story (hotel lobby) increases vulnerability • Building location • Soil type is critical • Fire following losses can be very significant CAS Reins. Boot Camp, 7/28/05

  24. Financial model factors • CEA mini-policy • Earthquake sublimits on commercial • Per policy • Per location • Regional sublimits (e.g. CA only) • Interlocking clause • Reduces event loss across multiple treaty years • Hard to model CAS Reins. Boot Camp, 7/28/05

  25. Differences between models • Detailed vs. Aggregate • Detailed models better capture these vulnerability and financial considerations • Fire Following • Significant difference in modelers • New Madrid • Significant difference in return period CAS Reins. Boot Camp, 7/28/05

  26. Earthquake prediction • Earthquakes not a Poisson process • Poisson implies inter-arrival times are exponentially distributed (memory-less) • 1999 Izmit (Turkey) Earthquake • Increased risk for a quake in Istanbul • San Andreas Fault • Is an earthquake due? Where on fault? CAS Reins. Boot Camp, 7/28/05

  27. CAS Reins. Boot Camp, 7/28/05

  28. Izmit Quake ctd. • 60% chance of Istanbul earthquake in next 30 years - Thomas Parsons, USGS • Researchers took into account the stress transfer from a magnitude 7.4 earthquake in Izmit, Turkey in August 1999. CAS Reins. Boot Camp, 7/28/05

  29. San Andreas Fault • Over the past 1,500 years large earthquakes have occurred at about 150-year intervals on the southern San Andreas fault. • As the last large earthquake on the southern San Andreas occurred in 1857, that section of the fault is considered a likely location for an earthquake within the next few decades • The San Francisco Bay area has a slightly lower potential for a great earthquake, as less than 100 years have passed since the great 1906 earthquake CAS Reins. Boot Camp, 7/28/05

  30. Cat Models and Earthquake Pred. • At least one cat modeling firm has variable earthquake rate (changes with calendar date) • Annual model updates allow for changing earthquake rate with time. CAS Reins. Boot Camp, 7/28/05

  31. Hurricanes • Meteorology of Hurricanes • Frequency of Hurricanes by category • Recent Hurricane Activity • Hurricane Andrew • Vulnerability and Financial Models • Hurricane prediction (?) CAS Reins. Boot Camp, 7/28/05

  32. Meteorology of Hurricanes • Occur in both Northern and Southern Hemispheres • Don’t occur on the equator • Factor in the 2004 Tsunami tragedy • Coriolis Force • spin clockwise in southern hemisphere • spin counter-clockwise in northern hemisphere • Need warm sea surface temperatures • Always travel from east to west CAS Reins. Boot Camp, 7/28/05

  33. CAS Reins. Boot Camp, 7/28/05

  34. Safir-Simpson Scale CAS Reins. Boot Camp, 7/28/05

  35. Atlantic Basin Hurricanes CAS Reins. Boot Camp, 7/28/05

  36. US Landfalling Hurricanes CAS Reins. Boot Camp, 7/28/05

  37. 2004 Season 2004 CAS Reins. Boot Camp, 7/28/05

  38. 2003 Season 2003 CAS Reins. Boot Camp, 7/28/05

  39. 2004 Hurricanes • Charley: 8/9-14, Small storm- strengthened rapidly to Cat 4 just before FL landfall • Frances: 8/25-9/8, Larger storm, weakened from Cat 4 to Cat 2 before FL landfall • Ivan: 9/2-9/24, Long-lived, Cat 5 storm, weakened to Cat 3 before AL landfall • Jeanne:9/13-9/28, Crazy Cat 3 storm, same landfall as Frances but smaller & faster CAS Reins. Boot Camp, 7/28/05

  40. 2004 Hurricanes ctd. CAS Reins. Boot Camp, 7/28/05

  41. Modeling Issues raised by 2004 storms • Storm Surge • Demand Surge • Frequency Distribution of Hurricanes • Offshore oil rig losses • Caribbean Clash modeling CAS Reins. Boot Camp, 7/28/05

  42. Hurricane Andrew • Period: 8/16-8/28 1992 • Small, intense CAT 5 Cape Verde storm • Affected Bahamas, S. Florida, Louisiana • Damage $25 BN, $15.5 Insured US damage • Central Pressure 992 mb, third lowest since 1900 CAS Reins. Boot Camp, 7/28/05

  43. CAS Reins. Boot Camp, 7/28/05

  44. Vulnerability model factors • Construction • Concrete bunkers vs. mobile homes • Location • Properties near ocean very vulnerable to storm surge • Secondary modifiers • E.g. Roof tie downs CAS Reins. Boot Camp, 7/28/05

  45. Financial model factors • percentage deductibles can be very significant • New season deductible in FL • What is a risk? • Issue for per-risk treaties • For hurricanes, widely dispersed buildings on one policy often considered one “risk” • E.g. school district CAS Reins. Boot Camp, 7/28/05

  46. Differences between models • Detailed vs. Aggregate models • Location (distance to coast) is critical • Need detailed model to properly assess • Northeast Hurricane • Significant difference between modelers • Caribbean clash • Not all modelers facilitate this analysis CAS Reins. Boot Camp, 7/28/05

  47. Hurricane Prediction CAS Reins. Boot Camp, 7/28/05

  48. Data/Modeling Issues • Need for completeness • Reinsurers need compensation for all risks being accepted • Model all exposures • Model all perils • Run multiple models CAS Reins. Boot Camp, 7/28/05

  49. Missing exposures • Sometimes only get tier 1 wind counties • Sometimes only certain states • E.g. CA, Pacific NW, New Madrid only • Other shake exposure ignored (e.g. East Coast) • Fire following exposures ignored • Sometimes entire books of business are missing • Must cross-check cat model exposure data • Premium often n.a. , policy counts (?) CAS Reins. Boot Camp, 7/28/05

  50. Modeling Tricks • Failing to load for LAE • Failing to consider demand surge • Abuse of secondary modifiers • “Really, all my policyholders have roof tie-downs!” • Running all the models and providing the lowest • different modeling firms • Aggregate vs. detailed models CAS Reins. Boot Camp, 7/28/05

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