Modeling Insured Exposures Against the Next Southeast Asian Catastrophe - March 2013


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Robert Muir-Wood, Chief Research Officer at RMS, shares his research and insight into natural catastrophes in Southeast Asia, and the complex issue of modeling insured exposures in the region.

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Modeling Insured Exposures Against the Next Southeast Asian Catastrophe - March 2013

  2. 2. THE LAST BIG SOUTH EAST ASIAN CATASTROPHE: 2011 THAI RIVER FLOODS • 1,215 factories across 33 provinces submerged A shock for many people: • Thai government • Facility owners • CROs of companies dependent on supplies • insurers • reinsurers - $46Bn economic loss • Cat modelers - 9% decline in 2011 Q4 GDP©2013 Risk Management Solutions, Inc.
  3. 3. 9 major dammed river WERE THE 2011 catchments in Thailand THAI FLOODS MANMADE? The Dam Ambiguity •Is a dam being operated to conserve water or to prevent floods? •As droughts are more common water conservation tends to win – as in 2011 •Can only operate for both with sophisticated algorithms taking into consideration long range forecasts •For next few years in Thailand - dam operators will be more concerned with flood prevention!©2013 Risk Management Solutions, Inc.
  4. 4. REACTIVE RISK MANAGEMENT: • RAISED FLOOD DEFENCES AT THE PARKS Bang-Pa Bangkadi Rojana Navanakorn©2013 Risk Management Solutions, Inc.
  5. 5. REACTIVE RISK MANAGEMENT: RAISED FLOOD • In 2011 unreinforced earth embankments around DEFENCES AT industry parks failed through piping and THE PARKS breaching • Reinforced defences now raised (c 1.5m) at all the principal industrial estates flooded in 2011 • New defences have reduced Thai river flood insured losses at these industrial estates dramatically – single site flood is now beyond 500 year RP©2013 Risk Management Solutions, Inc.
  6. 6. THE ‘SHUTTING THE STABLE DOOR AFTER THE HORSE HAS BOLTED’ CAT MODELING AGENDA •As a result of the new flood walls the next major insured catastrophe loss in SE Asia will not be Thai river flood •Do we need probabilistic catastrophe models of all relevant perils and regions? •Is there another way in which to comprehend the correlated risk?©2013 Risk Management Solutions, Inc.
  7. 7. MICHAEL PORTER’S 1990 COMPETITIVE ADVANTAGE OF BUSINESS CLUSTERS •Professor at Harvard Business School. Leading thinker around international business strategy •Studied how sectoral ‘business clusters’ in developed countries had fostered competitive advantage by increasing productivity through proximity •forcing competitive innovation •stimulating the creation of new businesses Widely adopted in SE Asia©2013 Risk Management Solutions, Inc.
  8. 8. INDUSTRY PARKS IN SE ASIA Since 1990 many rapidly growing countries without primary resources have employed the sectoral cluster model as their principal tool for driving development The initial role of the Government is: •to identify the target sector •develop the initial infrastructure on an extendable site •create tax incentives •invite anchor ‘sogoshosha’ firms (who will bring other suppliers in their ‘keiretsu’)©2013 Risk Management Solutions, Inc.
  9. 9. WHAT IS THE •Flat (for production lines) CHANCE MULTIPLE INDUSTRIAL PARKS •Cheap •Not previously built on = Floodplain •Expandable site ARE AFFECTED BY THE SAME CAT? Number of days closed 0 20 40 60 80 Saha Rattana Nakorn Rojana Wangnoi (Factory Land) Hi-Tech Bangpa-In Navanakorn Bangkadi©2013 Risk Management Solutions, Inc.
  10. 10. THE CHARACTERISTICS OF SE ASIA INSURANCE RISK Industry Parks City Centres and CBDs International Supply Chains Tourist Centers •Large concentrations of •Major business offices, hotels Critical supply chain linkages industry sector linked and shopping malls to major manufacturers far manufacturers away in Japan, US or •International companies and Germany. •Can cover many km2 hotel chains •Commonly in the hinterland of •Separation distance irrelevant •In the largest capital cities principal city • However goods pass through •Concentrated around the CBD critical seaports/airports •High insurance penetration •Often in flood plains •Industry sector -specific •Several parks may be in the linkages not related to spatial same hazard footprint proximity©2013 Risk Management Solutions, Inc.
  11. 11. Insurance penetration THE TOPOLOGY OF INSURED EXPOSURE IN SE ASIA Thailand US <2% of all properties are insured • However these are the highest value properties SE Asia Value deciles • And highly concentrated Normalized insured exposure separation Need to understand the motivations for exposure distance concentration US And the degree to which the ‘concentrators’ relate to 0.1 1 10 100 risk Log distance km©2013 Risk Management Solutions, Inc.
  12. 12. A TALE OF TWO CITIES New Orleans 2005 Bangkok 2015 Rapidly sinking delta Rapidly sinking delta Large areas of city Large areas of city below sea level below sea level Over extraction of Over extraction of groundwater groundwater Poorly maintained Inadequate surge surge flood defences flood defences In the path of frequent In the path of tropical cyclone storm infrequent tropical surges cyclone storm surges Home to 450,000 Home to 8.5 million people people Well rehearsed No evacuation plans evacuation plans©2013 Risk Management Solutions, Inc.
  13. 13. STORM SURGE FLOOD IN MYANMAR 2008 NARGIS •No-one had previously considered this track •One of two ‘worst case’ Bangkok storms/tracks for Irrawaddy delta •No similar storm surge observed over past Century •No education around the risk •No evacuation plan •No forecast passed on to the people •More than 100,000 died©2013 Risk Management Solutions, Inc.
  14. 14. GUANDONG & PEARL RIVER DELTA STORM SURGE •120 million people •13.45% average growth since 1978 •9 major cities •Shenzen – biggest port in China after Shanghai Areas below sea level in purple©2013 Risk Management Solutions, Inc.
  15. 15. TSUNAMI FROM LUZON ARC SUBDUCTION • business was locate dhere ZONE •Luzon Arc Mw9.3 event •Maximum tsunami heights •Da Nang, Vietnam (952,000 population)©2013 Risk Management Solutions, Inc.
  16. 16. THE MANILA RISK CONCENTRATION •Major concentration of risks in Manila •Volcanoes to the north, west and south •Flood zones in and around city and Laguna de Bay •Potential storm surge for slow moving track to the north of the city •Local M7 earthquake on Valley Fault •M9 earthquake and accompanying tsunami on Luzon Arc subduction zone©2013 Risk Management Solutions, Inc.
  17. 17. PRINCIPAL INDUSTRIAL CLUSTERS IN SE ASIA •For each cluster we know the specific companies and industry sectors in the park •Intelligence that can support locating the exposure©2013 Risk Management Solutions, Inc.
  18. 18. SIGNIFICANCE OF KNOWING WHERE THE SPECIFIC INDUSTRY IS SITUATED: RMS TYPHOON FLOOD MODELLING Example #1: Pukou, Example #2 : Pearl River Jiangsu - west of Shanghai Delta (Guangdong) Multiple parks engaged in hi-tech High tech and machinery assembly, large portion of Foxconn manufacture on Yangtze river (Apple) industry, right on the coast Jiangsu Coordinate Province Guangzhou Coordinate Province AAL 0.07 0.01 AAL 0.06 0.02 100 y RPL 2.10 0.47 100 y RPL 1.30 0.60©2013 Risk Management Solutions, Inc.
  19. 19. LOSS ACCUMULATION MANAGEMENT •Multiple views of risk available & multiple PMLs can be applied •Capacity management at aggregate zone-level Country Resolution Resolution Building Content BI PML Value PML PML Thailand Postcode 10250 15% 10% 5% Thailand Postcode 10510 15% 15% 5% Thailand Postcode 25190 15% 10% 5% Thailand Postcode 10560 15% 15% 5% Thailand Postcode 25000 20% 10% 5% Thailand Postcode 25130 20% 50% 5% Thailand Postcode 12170 20% 50% 5%©2013 Risk Management Solutions, Inc.
  20. 20. IMPACT OF LOCATION DATA ON RISK Geolocation Significance •VRG hazard consistently higher than province level hazard •Results for a nationwide survey of 10 industrial parks •Industrial parks often situated in fluvial and coastal flood zones©2013 Risk Management Solutions, Inc.
  21. 21. SUPPLY CHAIN Strategic planning requires the company to answer, DISRUPTION – “What is acceptable risk?” FIRST OF ALL A Challenge to management is to determine an acceptable probability PROBLEM FOR of a minimum tolerable system downtime. CORPORATE RISK • Definition of Risk = Probability of an event occurring and MANAGEMENT the impact of that event – 10-day downtime once per year, and 10-day downtime once per 100 years are very different levels of risk. • Both Toyota and Nissan Motors recently announced their ‘acceptable impact threshold’… – Nissan system to recover within 2 weeks, supplier’s to recover within 4 weeks – What risk level is managed? Four weeks per year, per 100 years, per 1000 years? – How to monitor & evaluate effectiveness of actions?©2013 Risk Management Solutions, Inc.
  22. 22. Supply-chain disruption due to any earthquake event anywhere in Japan Site 1 Site 2ANALYSISFRAMEWORK Downtime DowntimeOF SUPPLY- Days Days Overall NetworkCHAIN Site 1 NetworkINTERRUPTION Site 3 DowntimeRISK Distribution Days Site 2 Assembly Assembly Plant Site 4 Downtime Site 3 Site 4 Days Downtime Downtime Days Days
  23. 23. EXPOSURE CENTRIC RISK MANAGEMENT Understand the motivation behind the accumulation The last big SE Asian loss was a Thai river flood Manage accumulations against a wide The next big one could be: range of potential catastrophes •An earthquake •A storm surge •A tsunami •An eruption •A toxic release •A Riot/occupation •Or a large river flood •Are you really prepared against what will happen?©2013 Risk Management Solutions, Inc.
  24. 24. QUANTIFYING RISK ACROSS SE ASIA: RMS SOLUTIONS KNOW YOUR EXPOSURE UNDERSTAND SCENARIOS PROB LOSS ANALYSIS EXPOSURREin region? • Exposure • Potential loss • Probabilistic risk by Where is it? accumulations location and peril • What is the value, is • Multi-peril • Risk Correlations it elevated or • Historical and worst • Tail risk beyond the defended? case scenarios historical record • Any specific policy • Probable maximum loss • Supply Chains coverages or (PML) analysis conditions? RMS Data RiskManager & RMS Cat Services Teams REACT library Models©2013 Risk Management Solutions, Inc.