© Stanhope by Hufton + Crow IIS 46 th Annual Seminar, Madrid, June 2010 Rowan Douglas CEO Global Analytics, Willis Re Chairman, Willis Research Network Managing Extremes: Forecasting Climate and Capital in a Modelled World

Managing Extremes in the Modelled World Return Period Loss Amount Catastrophe model – exceedence probability output

3 Natural Catastrophe and Insurer Security Example insurer: Capital requirement gross of reinsurance under EU Solvency 2 QIS4 Underwriting Market Default Operational 77% 20% 0% 3% Risk Based Capital Regulation via Modeling Extremes

4 Models Create & Consume Capital Base Secondary Modifier Post 07 UK Flood SCR362,306,050304,898,030481,258, %-15.8%32.8% Underwriting329,678,240270,984,530450,279,460 Catastrophe300,000,000234,000,000429,000,000 Capital Impact - 57,408,020118,952,030 all figures in £ Insurer Responses: - Master of Models, not servant - Science to reduce uncertainty

5 Embracing Public Science

The Rise of the Supermodel Historical data is no longer sufficient The industry is entering a new era of extreme climate & weather risk modelling Simulation of planet’s climate system using high resolutions Global Climate Models Improved evaluation of current risk levels Global & regional teleconnections – diversification benefits

Catastrophe Management is about Time and Space Dispersion,all storms (3- monthly storm transit counts) Dispersion, most intense storms (exceedance probability=20%)

Operational Climate Forecasting

Building Stock Inventories (Quickbird/Cambridge) Global climate monitoring (NCEO) Flood monitoring (Infoterra) The Second Space Age TerraSAR X (DLR) Sentinel – 3 (ESA) Cloudsat - NASA Haiti Earthquake/AlOS SAR (JAXA) Earthquake damage assessment (Cambridge)

Global Earthquake Model

Redefining Sustainability, Financial Security and Repositioning Insurance Sustainability = avoiding or managing undesirable extremes within tolerable parameters Unifying Financial Security, Sustainability and Poverty Reduction under a common philosophy and framework Poverty reduction interventions should perhaps be focussed on helping communities avoid or manage intolerable impacts of extremes As re/insurance enables society to understand, manage and share extreme risks at global and local scales via public and private mechanisms it is being repositioned at the centre of solutions of sustainability