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Exact Catastrophe Exposure Management - Whitepaper

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Global catastrophic risks are risks that seriously threaten human well-being on a global scale. An immensely diverse collection of events could constitute global catastrophes: potential factors range …

Global catastrophic risks are risks that seriously threaten human well-being on a global scale. An immensely diverse collection of events could constitute global catastrophes: potential factors range from volcanic eruptions to epidemic infections, nuclear accidents to worldwide tyrannies, out-of-control scientific experiments to climatic changes, and cosmic hazards to economic collapse. This paper outlines how catastrophe exposures place special demands on insurer capitalization and require a distinct risk management approach. The interaction or co-variance (versus independence) of the various risks, a company faces, is an important factor in determining the company’s total capital requirements.


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  • 1. www.niit-tech.com Catastrophe Exposure Management NIIT Technologies White Paper
  • 2. CONTENTS Introduction 3 Data Warehousing for Insurance Industry 3 How it impacts insurers? 3 How Natural Catastrophe Risks are managed by insurers? 4 Catastrophe Loss;A look at the statistics 5 Catastrophic Risks: Choosing the right tool 6 Conclusion 6 How companies can be benefited from ‘Exact’ 6
  • 3. Introduction How it impacts insurers? Global catastrophic risks are risks that seriously threaten human Catastrophe exposures place special demands on insurer capital- well-being on a global scale. An immensely diverse collection of ization and require a distinct risk management approach. The events could constitute global catastrophes: potential factors range interaction or covariance (versus independence) of the various risks, from volcanic eruptions to epidemic infections, nuclear accidents to a company faces, is an important factor in determining the worldwide tyrannies, out-of-control scientific experiments to climatic company’s total capital requirements. changes, and cosmic hazards to economic collapse. Catastrophes represent significant financial hazards to an insurer, The tipping point: Katrina exposes a new trend including the risk of insolvency, an immediate reduction in earnings We live in a world that is increasingly uncertain. For the first time in and statutory surplus, the possibility of forced asset liquidation to history humans dominate the planet and yet, paradoxically, the meet cash needs, and the risk of a ratings downgrade. success of globalization has increased the risks we face. For property and casualty insurers, catastrophes are defined as Nature has raised the stakes. In 2004 a record number of hurricanes infrequent events that cause severe loss, injury, or property damage and typhoons struck Florida and Japan. In 2006, Katrina and Rita to a large population of exposures. delivered a one-two punch to New Orleans and Texas, tragically destroying thousands of lives and causing up to $400 billion in Whereas most property insurance claims are fairly predictable and property losses. independent, catastrophe events are infrequent and claims for a given event are correlated. The insurance process, if left unmonitored during lengthy catastrophe-free intervals, could produce increasing concentrations of catastrophe exposure. Challenges faced by insurance industry Catastrophe exposures broadly impact the insurance industry and present the following challenges: • Identifying catastrophe risk appetite • Measuring catastrophe exposure • Pricing for catastrophe exposure • Controlling catastrophe exposure While people watch TV screens in shock and disbelief, scientists • Evaluating ability to pay catastrophe losses forecast a new global trend. Hurricanes that could impact the US are increasing in strength and frequency. Many believe that we are entering a new geological cycle and that the increased storm volatility is caused by the warming of the seas, part of an overall pattern of global warming. We may need to brace ourselves for several decades of more frequent and intense floods, hurricanes and typhoons. We need to prepare for an increasingly dangerous physical environment, and we need to do that fast. How Natural Catastrophe Risks are managed by insurers? Accumulation Control • Commercial Earthquake - Earthquake coverage is only given as an extension of thestandard policy. 3
  • 4. - The number of policies is limited. • Current approach – “Probabilistic” - Control of accumulation is relatively easy. - The computer simulation of all the possible losses - Accumulation per Zone is monitored and controlled in day today that couldhappen within a long period of time. underwriting. - This type of model also makes it possible to understand therelationship between loss potential and Wind /Flood occurrence frequency.Insurers are increasingly using - Wind cover is basically provided in all fire policies. these models.Some have in-house models. Some - Flood cover is basically provided in all comprehensive depend on professionalcompanies. firepolicies. Fixing Retention Level Decision making factors - The number of policies is enormous. - Daily monitoring and control of accumulation is rather Cost of Reinsurance Overall Decision Impact on PL Risk Profile difficult. Capital Strength - To grasp and control actual accumulation is essential, but toarrive at more realistic and meaningful assess- - Management is fully involved in the decision process, ment of theirfinancial risk involved, they need to use because how much they can/should retain those some other tools. largest risks is one of the most significant issues. Assessment of Maximum Possible Loss (MPL) - Some insurers have their own model for the simula- • Traditional approach - “As if” tion of their optimum retention. - To estimate MPL based on the past records. - Applying past losses to the insured values that exist now. Catastrophe Loss; A look at the statistics - Good to know a single, simple, individual loss. Significant natural catastrophes worldwide 2011 Month Event Country Overall losses Insured losses US$m original values Fatalities 2,10,000 35,00040,000 15,840 Thailand 40,000 10,000 813 Earthquake New Zealand 16,000 13,000 185 April Severe Storms, tornadoes USA 15,000 7,300 350 May Severe Storms, tornadoes USA 14,000 6,900 178 Jan-Dec Drought USA 8,000 2,400 August-September Hurricane USA, Canada 7,400 5,600 55 April-May Floods USA 4,600 50 9 April Severe Storms, tornadoes USA 3,500 2,000 9 January Floods Australia 2,800 1,875 22 March Earthquake, Tsunami Japan August - November Floods February Source: Munich Re 4
  • 5. Insured catastrophe losses in the first half of 2012 came to Around the world, major earthquakes struck in Italy, the Philippines, $12bn, out of $26bn economic losses, according to the world’s Iran, and Afghanistan. The Philippines were also slammed by largest reinsurer Munich Re. This compares with a long-term, or Typhoon Bopha, which claimed over 1,000 lives and left many 10-year, average (LTA) insured loss of $19.2bn and an economic more homeless. loss of $75.6bn. While global economic losses were close to average in 2012, insured losses last year were 36 percent higher than the 10 year average ($72 billion vs. $53 billion) because the two most costly events of the year occurred in the U.S., which has higher than average insurance penetration. The two major U.S. natural peril events, Hurricane Sandy and a year-long drought, accounted for two-thirds of all 2012 insurance losses globally and nearly half of all economic losses for the year, according to The Annual Global Climate and Catastrophe Report. Modenesi's Towers of Finale Emilia are destroyed following an earthquake on May 20, 2012 in Ferrara, Italy • Despite a relatively quiet year for tornadoes, insured losses from This Oct. 31, 2012 file aerial photo shows the damage to an amusement park left in the wake of Super storm Sandy, in Seaside thunderstorm events exceeded $14 billion, the second highest annual total on record. Heights, N.J. (AP Photo/Mike Groll, File) • Severe drought cripples agriculture over large section of central 2012 saw many natural disasters strike across the globe, killing United States. thousands and inflicting billions of dollars in property and infrastructural damage. From hurricanes and earthquakes to droughts, heat waves and wildfires, events were both widespread • Dry conditions lead to the most damaging wildfires in Colorado history. and severe. 5
  • 6. Catastrophic Risks: Choosing the right tool The extent to which companies need to prepareeffectively for catastrophe will depend on theirresources, size, industry and the level of risk that theyface. Heavily regulated industries, such as With advances in computer technology, new quantitative tools have financialservices, or those that operate in regions of highseismic activity been developed to helpmanage catastrophic risk. Geographic or terrorist threat, will undoubtedlyneed to put in place more information systems have allowed companies toresurrect the “pin sophisticated plans. Such preparations need not be expensive or maps”, with significant additional abilities. But, well beyond merely time-consuming—even straightforward precautions, suchas backing looking atexposures, catastrophe simulation models have given us up all data to a remote site on a daily basisand putting in place policies the ability to estimate potential lossesin a way that truly reflects the for employees in theevent of a catastrophe, could make the long term frequency and severity distributions. differencebetween survival and extinction. Models can have deterministic and/or probabilistic approaches. As the level and variety of threats that companiesface increases, they Deterministic modelling is the simulation of specific events, either are likely to face greater pressurefrom external sources, such as historical or hypothetical, which are pertinent to theportfolio under regulators, customersand shareholders, to put in place good study. This can be helpful for validating model results, or for providing catastrophe riskmanagement. Executives who have ensured that anestimate for a certain event which concerns management. theircompany has robust plans in place will not only bewell prepared for a range of eventualities, but will alsodemonstrate to the broader However, probabilistic modelling has the potential to provide much stakeholder communitythat they take seriously their responsibility more information tomanagement. In this method, the modeller runs forprotecting the organisation over the long term. a large library of hypothetical events thatcovers the range of potential events. From the results of all of these simulations, the modellercan estimate the probabilities of various levels of loss to the its exposure portfolio and determine reinsurancedecisions by How companies can be benefited from ‘Exact’ comparing the potential losses with the company’s appetite for risk. Risk assessment software from NITL is used extensively by company (i.e., loss likelihood).This allows the company to manage underwriters and captive insurers of location-based assets in the Lloyd's and Companies markets to effectively manage their risk Catastrophe Loss; A look at the statistics It is impossible for companies to consider every eventuality that they could face in the future, andmany of the incidents for which they do preparemay never happen. But despite this, companies wouldbe foolish to ignore catastrophe risk managementon the grounds that such incidents are eitherunforeseeable or too remote. Many of the precautionsthat companies need to put in place to deal withcatastrophe are generic and would apply in the caseof any exposure aggregations globally for all major classes of business. A key decision-making tool, Exact Advantage offers advanced aggregation capabilities enabling insurers to effectively monitor exposure to help analyse the levels of risk against a variety of live, historic and "what-if" natural and man-made disaster scenarios, such as hurricanes, earthquakes, terrorist attacks and floods. Exact Advantage aids the underwriting evaluation process, for planning and arranging outward reinsurance protections and for completion of regulatory requirements, i.e. Lloyd's Realistic Disaster Scenarios. major incident. Exact Advantage has the flexibility to support complex reporting based For example, employees andassets must be protected, IT on geographic location, the peril and class of business, the policy limit infrastructure and otheroperations must be restored, and reputation and deductibles and is used for all major classes of business including mustbe maintained using open, constant communicationwith Property & Casualty, Onshore Energy, Offshore Energy and Terrorism. customers, investors and the media. As such, companies should not necessarily focus on specificthreats but rather on the general The perfect storm for insurers - underwriters, regulators and decision-makingstructures, roles and responsibilities, and prioritiesthat investors - require greater understanding of risk with transparency of they would need to set for any major incident. reporting but catastrophes worldwide, cat model challenges (lack of coverage, unreliable, black box), variable quality of risk data hinder accurate forecasting. 6
  • 7. About NIIT Technologies NIIT Technologies is a leading IT solutions organization, servicing customers in North America, Europe, Asia and Australia. It offers services in Application Development and Maintenance, Enterprise Solutions including Managed Services and Business Process Outsourcing to organizations in the Financial Services, Travel & Transportation, Manufacturing/Distribution, and Government sectors. With employees over 8,000 professionals, NIIT Technologies follows global standards of software development processes. Over the years the Company has forged extremely rewarding relationships with global majors, a testimony to mutual commitment and its ability to retain marquee clients, drawing repeat business from them. NIIT Technologies has been able to scale its interactions with marquee clients in the BFSI sector, the Travel Transport & Logistics and Manufacturing & Distribution, into extremely meaningful, multi-year "collaborations. NIIT Technologies follows global standards of development, which include ISO 9001:2000 Certification, assessment at Level 5 for SEI-CMMi version 1.2 and ISO 27001 information security management certification. Its data center operations are assessed at the international ISO 20000IT management standards. India NIIT Technologies Ltd. Corporate Heights (Tapasya) Plot No. 5, EFGH, Sector 126 Noida-Greater Noida Expressway Noida – 201301, U.P., India Ph: + 91 120 7119100 Fax: + 91 120 7119150 Americas NIIT Technologies Inc., 1050 Crown Pointe Parkway 5th Floor, Atlanta, GA 30338, USA Ph: +1 770 551 9494 Toll Free: +1 888 454 NIIT Fax: +1 770 551 9229 Europe NIIT Technologies Limited 2nd Floor, 47 Mark Lane London - EC3R 7QQ, U.K. Ph: +44 20 70020700 Fax: +44 20 70020701 Singapore NIIT Technologies Pte. Limited 31 Kaki Bukit Road 3 #05-13 Techlink Singapore 417818 Ph: +65 68488300 Fax: +65 68488322 Write to us at marketing@niit-tech.com www.niit-tech.com D_37_170513 A leading IT solutions organization | 21 locations and 16 countries | 8000 professionals | Level 5 of SEI-CMMi, ver1.2 ISO 27001 certified | Level 5 of People CMM Framework