2015.10.05 anra session paolo bazzuro

MODELLING AND QUANTIFICATIONOF THE ECONOMICIMPACT OF EXTREME CLIMATE-RELATED RISKSProf. Paolo BazzurroEmail: [email protected]

Institute for Advanced Study IUSS PaviaWorkshop

mailto:[email protected]

BRUSSELS, 20-21 October www.ferma.eu

FORUM 2015Venice, Italy 4-7 October

What is risk? Risk to Whom or to What? How is Risk

Measured? Exposure

Population Buildings (residential,

commercial, public) Infrastructure (bridges, dams,

ports, etc.) Crops and Livestock

Impact Fatalities, injuries Monetary losses Resiliency


FORUM 2015Venice, Italy 4-7 October 3

Why Are Cat Risk Models Built?

To support decisions about risk management

Risk Retention Risk Mitigation and Control Risk Financing/Transfer Risk Avoidance



IndividualPolicy Holder

Retro MarketPrimary Insurance Market

Buys

PrimaryPolicy

ReinsuranceContract

CorporatePolicy Holder

Sells SellsBuys

Insurer Reinsurer

Cedes

Reinsurance Market

CatastropheBond

SPV(Special Purpose

Vehicle)

CedesCapital Markets(Hedge Funds, Money

Managers, etc.)Buys Sells

Invests Broker

Cat Risk Models Serve All the Segments of the Insurance Industry

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Who Else Uses CatastropheRisk Models?

• Catastrophe/relief funds and risk pools (e.g., California Earthquake Authority, Caribbean Catastrophe Risk Insurance Facility, Pacific Catastrophe Risk Insurance Pilot)

• Rating Agencies (S&P, Moody’s, Fitch)• Real estate management and investment• Mortgage lending Institutions• Major banks (WB, ADB, IADB, etc.)• In US, Fannie Mae, Freddie Mac and the secondary mortgage market• Major Corporations (Dow Chemical, Devon Energy, Arkema, Sony,

General Motors, etc.)• Governments and their departments (U.S. Department of Homeland

Security, the U.S. Navy, the Risk Management Agency, a division of the U.S.D.A., Mexican Government, etc.)

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Why Do Corporations Need Catastrophe Risk Models?

• Accurately quantify, help mitigate, and manage catastrophe risk

• Are the conventional Catastrophe Risk Models enough?• Catastrophe Risk Engineering Models more appropriate

Primary needs– Risk assessment and mitigation

• Explicitly includes business interruption– Post-catastrophe response

• Damage assessment and repair concepts

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A Brief History of Catastrophe Modeling in the Insurance

Industry

US Hurricane, Tornado &

Earthquake Models

• Introduced

Late1980s 2000

First Catastrophe Bond Issued Transferring

Risk to Capital Markets

Introduction of Performance-

Based Earthquake Engineering

(PBEE)

Mid- 1990s

Cat Models capture the

attention of the industry

Hurricane Andrew (1992)

• $16B

Northridge EQ (1994)

• $12B

1992,1994

• World Trade Center Attack

• First Terrorism, Workers’

Comp Models

Introduced One Year

Later2001,2002

Decade of the 00s: Introduction of Wildfire, Winter Storm, Crop Loss and Offshore Assets

(Gulf of Mexico), Pandemic Flu Models

2004,2005 2009

11 Insolvencies after Hurricane

Andrew and several after Northridge

3 Insolvencies after Hurricane

Katrina

Record Breaking Hurricane

Seasons of 2004 & 2005

Hurricane Katrina (2005)

• $41B

2006

Introduction of First Hurricane

Models Conditioned on

Warm Sea-Surface

Temperatures

M O D E L D E V E L O P M E N T T I M E L I N E

Introduction of Tsunami Model for the Pacific

20122011

Tohoku Earthquake

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FORUM 2015Venice, Italy 4-7 October 8

What is the Coverage Worldwide of Cat Risk Models for the

Insurance Industry? Most of them are for the developed parts of the world or

for fast-growing countries where the insurance industry is mature

A large portion of the world (i.e., most of the developing countries) is currently left out

Things are slowly changing Sovereign Risk Financing Initiatives (Caribbean, Pacific Islands

Countries, South America, Mexico, etc.) The Global earthquake Model (GEM) (http://

www.globalquakemodel.org/) CAPRA (http://www.ecapra.org/)

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http://www.globalquakemodel.org/



http://www.ecapra.org/

http://www.ecapra.org/



What is Risk Assessment?

Hazard Exposure Vulnerability Impact

Cost to Government, Business and

Society

Fatalities, injuries, displaced persons

Damage to buildings,

infrastructure

Risk = probability of damage and loss to population and assets (Loss Valued in Human and Financial terms)

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The Objectives Dictate the Risk Analysis Approach

•

Incr

easi

ng E

ffort

& C

ompl

exity

Hazard/Risk Index or Profile

Pros: fast, low data requirements, output easy to understand

Cons: Low resolution, subjective

Historical ScenarioPros: based on event-specific data, good for frequent hazards

Cons: misses extreme events, potential impacts of climate change

Probabilistic

Pros: accounts for both frequent/low-impact and rare/extreme events

Cons: high data/expertise requirements, need to ensure outputs can be understood

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#11

The risk modeling approach is conceptually simple

1. Identify Study

Region

3. Define and Overlay

Exposure

5. Estimate Losses

4. Model Damage

2. Characterize

Hazard

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#12

1. Identify Study

Region


Exposure

• 5. Estimate Losses

4. Model Damage

2. Characterize

Hazard


#12



#13

Identification of the Study RegionFlood hazard modeling at a regional

scale Inaccuracies often tolerated:• Poor accuracy digital

elevation model• Presence of levees,

dykes, and adoption of flood control infrastructures,

• disregard of tide effects

• If levees are modeled, they are added after the inundation area is computed

• Hydraulic models replaced by purely statistical models

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#14

Flood Hazard Modeling at an Urban Scale: none of these

simplifications would be acceptable

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#15

1. Identify Study

Region


Exposure


4. Model Damage

2. Characterize

Hazard


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Hazard Characterization – Tropical Cyclone Peril

Hazard

• HAZARD

Intensity Calculation

Hurricane Occurrence

Where?How Strong?

How frequent?

Generating the stochastic catalog of potential future

events

16



#17

1. Identify Study

Region


Exposure


4. Model Damage

2. Characterize

Hazard


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• $

Physical Location, Size and Shape

Administrative Area

Land Ownership

Land Cover and Land Use

Construction Period

Structural Characteristics

Demographic or Social Characteristics

Economic Characteristics

EXPOSUREDATABASE

Building and maintaining an integrated, centralised and spatially-enabled database is the most effective way to manage exposure information

Assembling an Exposure Database

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The Scale of the Risk Assessment and the Peril Dictate the Exposure Data

Collection Regional vs. urban vs. site-specific studies

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Level of detail increases

• Perils with very localized effects. The impact of flood, tsunami, landslide, rockslide, hail risk studies require a more detailed exposure database than risk studies for other perils (e.g., earthquake ground shaking and wind)



Building Digitized and Field Verified: Nadi, Fiji

Specific location of buildings is necessary for urban scale studies and for perils with localized effects

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Clusters of Buildings Within Delineated Polygons: Appropriate for Regional Studies and Perils without (or with Limited) Localized Effects

21



#22

1. Identify Study

Region


Exposure


4. Model Damage

2. Characterize

Hazard


22



Mean Damage Function for California Wood Frame Buildings of given Vintage based on Claims Data (1994

M6.7 Northridge Earthquake) • Company

• Company

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#24

1. Identify Study

Region


Exposure

5. Estimate Losses

4. Model Damage

2. Characterize

Hazard


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Catastrophe Models Provide a Wide Range of

OutputsExceedance Probability (EP) Curve - Occurrence

0%1%2%3%4%5%6%7%8%9%

10%

0 50 100 150 200 250 300 350 400Loss Amount ($ millions)

Exc

eeda

nce

Pro

babi

lity

0

50

100

150

200

250

300

350

10 20 50 100 250 500 1,000

Estimated Return Period

Loss

Am

ount

($m

illio

ns)

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Standard Output is the Loss Annual Exceedance Probability CurveExceedance Probability (EP) Curve - Occurrence

0%1%2%3%4%5%6%7%8%9%

10%

0 50 100 150 200 250 300 350 400Loss Amount ($ millions)

Exc

eeda

nce

Pro

babi

lity

0

50

100

150

200

250

300

350

10 20 50 100 250 500 1,000

Estimated Return PeriodLo

ss A

mou

nt ($

mill

ions

)

The Average Annual Loss (AAL) is the mean, or average, loss over a long period of time

CAUTION!

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How Do Parametric Insurance and Catastrophe Bonds Fit in the Cat Risk

Modeling Framework?• HAZARD

•ENGINEERING

• FINANCIAL

Intensity Calculation

Exposure Information

Damage Estimation

Event Generation

Policy Conditions

Landfall Location & Cent. Press.

Local Wind Speed

Insured Loss1st Generation Parametric

2nd Generation Parametric

Indemnity

• Cat-in-a-Box• Carvill Hurricane

Index

• Measured Wind Speed at Concentrations of Exposure

• Indemnity bonds

Insured Loss Calculations

Industry Loss• ILW• PCS Bonds

Modeled Loss & Hybrids• Modeled Loss bonds• Modeled Loss/PCS hybrids• Modeled Loss/Parametric

hybrids 27



Beyond Economic Losses:Integrated Risk

• Khazai et al.( 2011)

RISK can be further factored by social, economic, political factors that influence vulnerability to obtain a risk index.

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Institute for Advanced Study IUSS PaviaWorkshop

Prof. Paolo Bazzurro

IUSS PaviaInstitute for Advanced StudyPalazzo del BrolettoPiazza della Vittoria, 1527100 Pavia – ITALY

Web: www.iusspavia.itEmail: [email protected]

http://www.iusspavia.it/

mailto:[email protected]

2015.10.05 anra session paolo bazzuro

Education