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Aon Benfield Analytics Evolution of Catastrophe Models Canadian Institute of Actuaries Seminar for the Appointed Actuary Toronto – 21 st September, 2012.

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Presentation on theme: "Aon Benfield Analytics Evolution of Catastrophe Models Canadian Institute of Actuaries Seminar for the Appointed Actuary Toronto – 21 st September, 2012."— Presentation transcript:

1 Aon Benfield Analytics Evolution of Catastrophe Models Canadian Institute of Actuaries Seminar for the Appointed Actuary Toronto – 21 st September, 2012

2 Contents 1.History of Catastrophe Models and Usage in a Canada 2.Recent Global Cat Events: How Could These Influence Canadas Models? 3.Modeling Changes Going Forward

3 Contents 1.History of Catastrophe Models and Usage in a Canada 2.Recent Global Cat Events: How Could These Influence Canadas Models? 3.Modeling Changes Going Forward

4 History of Catastrophe Models and Usage in a Canada 3 Risk Management Solutions (RMS) Founded in late 1980s Largest catastrophe modelling firm globally First offered Canadian earthquake model in 1991 Currently offers the widest array of catastrophe models for Canada

5 4 EQECAT Founded in early 1990s ranked 3 rd in catastrophe modelling firms globally Currently offers earthquake catastrophe model for Canada First model: scenario-based DLM hazard module based on 1985 Geologic Survey of Canada (GSC) First (major) update: stochastic with time dependence includes fire following hazard module based on 1996 GSC latest science on attenuation, soils, vulnerability Platform migration from desktop to WorldCATenterprise Second (minor) update: soil classification based on detailed differentiation by type Latest (major) update: hazard module based on 2005 GSC soil-based attenuation updated spectral accelerations updated vulnerability -guidelines for regulatory (OSFI) reporting Third (minor) update: postal code revision including geographical boundaries History of Catastrophe Models and Usage in a Canada

6 AIR Founded in 1987 Ranked 2 nd in catastrophe modelling firms globally Currently offers earthquake and severe thunderstorm catastrophe models for Canada History of Catastrophe Models and Usage in a Canada First Canadian model: Stochastic DLM for Severe Thunderstorm Introduction of EQ model: Stochastic DLM EQ model update Severe Thunderstorm update Exposure data update: EQ Severe Thunderstorm

7 6 Early 1990s: individual risk brokers and underwriters involved in Canadas large commercial lines segment accumulation exposures modeled on more of a deterministic basis by 3 rd party modelers and reinsurers Mid-1990s: accumulation exposures modeling shifting to stochastic basis by 3 rd party modelers and reinsurers B-9 Earthquake Exposure Sound Practices (1998): BC and QC exposures Minimum 250-year PML increasing to 500-year by 2022 Risk characteristics: year built, height, occupancy, construction and soil conditions Encouragement of models versus conservative, deterministic Default Loss Estimates 2000s: Industry consolidation Increased model dependency to facilitate greater spread of risk and avoid overconcentration Increased scepticism in model outputs due to excessive, unanticipated model miss (e.g. Hurricane Katrina) History of Catastrophe Models and Usage in a Canada

8 7 E-18 Sound Business and Financial Practices Stress Testing (2009): Testing the financial stability of federally regulated Canadian P & C (re)insurers under various areas of risk including accumulations exposures Eventual May 2012 EQ stress test modeling four specific events: 2 peak (BC M9.0 & QC M7.0) and 2 non-peak B-9 Earthquake Exposure Sound Practices (2012 revised draft): (Re)insurers required to further develop prudent, company-specific approach in using catastrophe models and associated uncertainties including: Scrutiny and oversight by senior management Integrity and verification of exposure data Sound, demonstrable knowledge of assumptions, methodologies and uncertainty in PMLs Non-modeled exposures - contingent BI, auto PD, claims expenses, ITV, GRC, increased seismicity, blanket/coverage extensions and model miss EQ PMLs based on EP curves on Canada-wide versus peak of BC or Quebec History of Catastrophe Models and Usage in a Canada

9 Contents 1.History of Catastrophe Models and Usage in a Canada 2.Recent Global Cat Events: How Could These Influence Canadas Models? 3.Modeling Changes Going Forward

10 Contents 1.History of Catastrophe Models and Usage in a Canada 2.Recent Global Cat Events: How Could These Influence Canadas Models? 3.Modeling Changes Going Forward

11 Recent Global Cat Events: How Could They Affect Canadas Models? M9.0 Tōhoku, Japan - March 11, 2011 M6.3 Christchurch, NZ – February 22, 2011 Following an EQ event, modelers send teams sent to: assess actual ground shaking versus modeled estimates collect empirical data on physical damage to the property and infrastructure within the impacted region to measure tsunami height estimates (if applicable) M8.8 Maule, Chile – February 27, 2010

12 Recent Global Cat Events: How Could They Affect Canadas Models? Maule, Chile Facts: February 27, 2010 Magnitude (M) 8.8 Offshore subduction event Depth of 35km ~450 km ruptured along the Nazca and South American plates Loss calibration demonstrated private-built infrastructure issues Other Observations Geographical concentration of highly interdependent industrial risks leading to unexpected, disproportionate time element losses Unanticipated tsunami losses Lessons Learned: Building Codes Lower degree of damage versus magnitude Benefit of successive improvements after subduction EQs

13 Recent Global Cat Events: How Could They Affect Canadas Models? M9.0 Tōhoku, Japan - March 11, 2011 M6.3 Christchurch, NZ – February 22, 2011 Lessons Learned: Model Miss Christchurch originally considered modest EQ hazard due to: Extended distance from closest strike slip and subduction faults areas Relatively firm soil that would not be subject to shallow depth events Based on 400 years of diligent records, common understanding of Japan Trench: to break in part generating maximum M7.5 to M8.4 events required costal areas to have corresponding building codes, zoning by-laws (Fukushima nuclear plant) and tsunami sea walls for events of this scale Liquefaction Likely combination of ill-effects on Christchurch: Preceding (09/2010, M7.1, strike-slip) EQ increasing ground subsidence, lateral spreading and reduced thickness of the non-liquefiable crust Higher groundwater levels (~ 800mm) versus 09/2010 event due to snow melting in the Southern Alps which recharged the Canterbury Plains Oblique-thrust crustal event with minimal surface bulging

14 Recent Global Cat Events: How Could They Affect Canadas Models? M9.0 Tōhoku, Japan - March 11, 2011 M6.3 Christchurch, NZ – February 22, 2011 Lessons Learned: Model Miss Christchurch originally considered modest EQ hazard due to: Extended distance from closest strike slip and subduction faults areas Relatively firm soil that would not be subject to shallow depth events Based on 400 years of diligent records, common understanding of Japan Trench: to break in part generating maximum M7.5 to M8.4 events required costal areas to have corresponding building codes, zoning by-laws (Fukushima nuclear plant) and tsunami sea walls for events of this scale Liquefaction Likely combination of ill-effects on Christchurch: Preceding (09/2010, M7.1, strike-slip) EQ increasing ground subsidence, lateral spreading and reduced thickness of the non-liquefiable crust Higher groundwater levels (~ 800mm) versus 09/2010 event due to snow melting in the Southern Alps which recharged the Canterbury Plains Oblique-thrust crustal event with minimal surface bulging

15 Contents 1.History of Catastrophe Models and Usage in a Canada 2.Recent Global Cat Events: How Could These Influence Canadas Models? 3.Modeling Changes Going Forward

16 Contents 1.History of Catastrophe Models and Usage in a Canada 2.Recent Global Cat Events: How Could These Influence Canadas Models? 3.Modeling Changes Going Forward

17 Modeling Changes Going Forward - EQECAT Platform & Functionality (revision Fall 2012) Future Generation (3G) Multi-layered correlation matrices to dynamically assess correlation Loss metrics to include Year Loss Tables (YLT) representing uncertainty as captured through multiple loss outcomes from each event Output of risk aggregation/allocation by region, peril, and business unit allowing integration of catastrophe risk model uncertainty into ERM Canada-Specific Updates Following complete revision in July 2011, none expected Vulnerability and Hazard GPS Technology in Subduction Zones Applicability in EQ models of current tracking of uplift and warping of leading edges overriding tectonic plates is currently being researched Two of the highest strained build-ups based on continuous Japanese GPS measurement since 1995: 1.Epicentral region of the 2011 Tohoku EQ 2.East coast of Hokkaido

18 Modeling Changes Going Forward - AIR Canada-Specific Updates (2014) EQ Inclusion of probabilistic liquefaction module based on high resolution soils and ground water tables Incorporating latest scientific findings from joint USGS and GSC 2014 update of Seismic Hazard Maps Severe Thunderstorm (likely changes) Year-built as a new primary building feature mainly for hail and straight-line wind exposures Inclusion secondary features for hail, i.e. roof characteristics and environmental conditions Addition of straight-line wind/tornado secondary risk features based on modified hurricane methodology Other Introduction of Winter Storm and Hurricane modules Vulnerability and Hazard Platform & Functionality (starting Fall 2012) Next Generation Concept Broadened as a complete enterprise platform for all segments of insurance industry Ability to customize certain model assumptions, e.g. frequency and severity, vulnerability functions Integration of company-specific catalogues for non-modeled perils Blending of external models with AIR models Cloud deployment

19 Modeling Changes Going Forward - RMS Platform & Functionality (transition starting in 2014) Cloud Based Leveraging technology and cost efficiency in cloud computing Available everywhere, all the time Open Model Architecture Ability to use other models within the platform Potential to include user companys proprietary models, customized vulnerability curves or other available models Canada-Specific Updates EQ module to include latest scientific findings from joint U.S. Geological Survey (USGS) and Geological Survey of Canada (GSC) update of Seismic Hazard Maps in 2014 Update to liquefaction module to be incorporated in the next update Possible update of time element vulnerability in the next update Vulnerability and Hazard Financial Modeling Moving toward full ground up simulation modeling for new models Ability to handle more complex contract types and structures

20 Modeling Changes Going Forward – Other Considerations Canada-Specific Eventualities New understanding of attenuation in stable continental regions resulting in refined definition of earthquake source zones, particularly in eastern Canada Refined modeling of fire following exposure and vulnerability to account for mitigation efforts such as the retrofit of the aerial transformers throughout downtown Vancouver Globally AIR, RMS, Swiss Re and Munich Re currently researching tsunami models for Japan Swiss Re currently exploring to revise global proprietary models to include contingent business interruption and diminish model miss from super cat events

21 Contents 1.History of Catastrophe Models and Usage in a Canada 2.Recent Global Cat Events: How Could These Influence Canadas Models? 3.Modeling Changes Going Forward

22 Contents Questions?

23 Contents Thank You!


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