Ocean Marine Overview and Catastrophe Modeling Issues Steven G. Searle, FCAS SVP Instrat

2000 – 2005 US Cat Losses

2005 Hurricane Losses Impact on Marine and Offshore Energy  Offshore Energy – Katrina RMS estimates between $2bn and $5bn Eqecat expects a loss ranging from $5bn to $8bn – Rita RMS estimates between $1bn and $2bn  Yacht – Katrina Insurance losses range from $300M to $400M. (Boat Owners Association of The United States- Oct 12, 2005)  Hurricane Katrina also destroyed an estimated 75% of the marinas along 150 miles of the Gulf Coast

Ocean Marine  Agenda – Marine Overview – Marine Results – Marine Catastrophe Modeling Developments

Ocean Marine  Agenda – Marine Overview – Marine Results – Marine Catastrophe Modeling Developments

Ocean Marine  Lines of Business – Cargo – Hull (blue-water, brown-water) – Commercial Protection and Indemnity (P&I) – Liability – Yacht (including P&I) – Offshore Energy

Ocean Marine Split by LOB CY Direct Written Premiums Source: AIMU 2005 Calendar Year Operating Ratios

Ocean Marine  Agenda – Marine Overview – Marine Results – Marine Catastrophe Modeling Developments

Calendar Year Ocean Marine Results Direct Business Source: AM Best Aggregates and Averages

Calendar Year Ocean Marine Results Net Business Source: AM Best Aggregates and Averages

Calendar Year US Marine Results Direct Written Premiums ($B) and Net Combined Ratio Companies reporting to the American Institute of Marine Underwriters Source: AIMU 2005 Calendar Year Operating Ratios

US Calendar Year Net Combined Ratios LOB detail Companies reporting to the American Institute of Marine Underwriters Source – AIMU 2005 Calendar Year Operating Ratios

US Calendar Year Net Combined Ratios LOB detail (cont.) Companies reporting to the American Institute of Marine Underwriters Source – AIMU 2005 Calendar Year Operating Ratios

US Calendar Year Net Combined Ratios LOB detail (cont.) Companies reporting to the American Institute of Marine Underwriters Source – AIMU 2005 Calendar Year Operating Ratios

Ocean Marine  Agenda – Marine Overview – Results – Marine Catastrophe Modeling Developments

Catastrophe Modeling Vendors Applied Insurance Research (AIR), EQECAT or Risk Management Solutions (RMS)  valuable knowledge inputs to identify, understand and manage risk

Modeled Perils  hurricane – wind – loss amplification/demand surge – storm surge  earthquake – shake – fire following – sprinkler leakage – loss amplification/demand surge  other wind  winter storm  terrorism  flood (Europe)  pandemics

Modeled Lines of Business  Personal lines property  Commercial lines property  Industrial property  Builders Risk  Auto Physical Damage  Workers Compensation  Lives at risk – Accident and Health  Marine (partially*) Marine lines Fixed Properties (marinas) - handle well Contents (warehouse cargo) - can handle with adjustments Oil Rigs - modeling capabilities available Mobile Property (cargo, floaters) - capabilities exist but are limited Yachts - capabilities in the RMS May 2006 release Commercial Hull (?)

Modeled Coverage Parts  Fixed Property – completed structures – structures under construction (e.g. shipbuilders risk) – machinery & equipment – piers / wharves – offshore platforms  Personal Property – contents – stock – electronic Data Processing equipment  Mobile Property – cargo – floaters including contractors equipment (though generally difficult to include) – personal yachts  Time Element

The Four Catastrophe Model Modules Module 2 Event Database Module 3 Damage Calculation Module 4 Loss Calculation Module 1 Data Preparation

Model Applications - Loss Potential “Occurrence" Return Period Losses Annual Probability of Non-Exceedance Return Period Damage (000s) Gross (000s) Net (000s) 90.00%10 $9,427$8,359$8, %20 $18,814$16,378$15, %50 $33,724$32,194$30, %100 $48,803$47,979$46, %250 $78,865$75,338$72, %500 $100,622$96,395$92, %1,000 $123,950$118,776$114,025 Average Annual Loss $3,597$3,482$3,343 A.M. Best Benchmarks U.S. Hurricane U.S. Earthquake

Yacht Modeling Capabilities X RMS RiskLink May 2006 release

RMS Construction Classification Update RiskLink version 6.0 (May, 2006)  Seven New RMS Yacht Classes (length and power) – Boats, inside a Building (Marina) - Precast Reinforced Concrete with Concrete Roof (RMS Code 54) – Boats, Moored, Less than 26 ft, Motor - (RMS Code 55) – Boats, Moored, Less than 26 ft, Sail – (RMS Code 56) – Boats, Moored, ft, Motor - (RMS Code 57) – Boats, Moored, ft, Sail (RMS Code 58) – Boats, Moored, Greater 60 ft, Motor (RMS Code 59) – Boats, Moored, Greater 60 ft, Sail (RMS Code 60)

Offshore Energy Modeling/Databases  RMS currently has offshore modeling capabilities – Version 6.0 Changes new construction classes new year built ranges new occupancy classes includes Contingent Business Interruption, Operators Extra Expense new loss amplification factors specific to offshore platforms  EQE to release offshore energy model  ERAS - database program used by many energy clients for capturing exposure information by platform – Exposure management only, no damage estimates or simulations of events.

Outlook  Role of Actuaries and Catastrophe Modelers continues to grow in the Marine renewal process.  Models will continue to be valuable as one of many information inputs… – but extremely dangerous if used as the only information input  Models have improved risk quantification significantly… – but can mislead if users do not understand shortcomings  Applications can create significant marketplace advantages… – but inappropriate applications can create hidden dangers  Models continue the tradition of innovation and progress… – but models are “not" perfect and need to improve

Questions