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Aon Benfield AnalyticsEvolution of Catastrophe Models Canadian Institute of Actuaries Seminar for the Appointed ActuaryToronto – 21st September, 2012
Contents
1. History of Catastrophe Models and Usage in a Canada
2. Recent Global Cat Events: How Could These Influence Canada’s Models?
3. Modeling Changes Going Forward
Contents
1. History of Catastrophe Models and Usage in a Canada
2. Recent Global Cat Events: How Could These Influence Canada’s Models?
3. Modeling Changes Going Forward
History of Catastrophe Models and Usage in a Canada
4
Risk Management Solutions (RMS)• Founded in late 1980’s• Largest catastrophe modelling firm globally• First offered Canadian earthquake model in 1991• Currently offers the widest array of catastrophe models for Canada
5
EQECAT• Founded in early 1990’s• ranked 3rd in catastrophe modelling firms globally• Currently offers earthquake catastrophe model for Canada
199293 1999 2002 2005 2010 20119
495
9596
97
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00
01
03
04
06
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08
09
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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 typeLatest (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
AIR• Founded in 1987• Ranked 2nd 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
199698 20049
900
95
01
02
03
06
071997 2005
08
09
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112007
Exposure data update:• EQ• Severe
Thunderstorm
7
Early 1990’s:
• individual risk brokers and underwriters involved in Canada’s large commercial lines segment
• accumulation exposures modeled on more of a deterministic basis by 3 rd party modelers and reinsurers
Mid-1990’s:
• 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
2000’s:
• 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
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
Contents
1. History of Catastrophe Models and Usage in a Canada
2. Recent Global Cat Events: How Could These Influence Canada’s Models?
3. Modeling Changes Going Forward
Contents
1. History of Catastrophe Models and Usage in a Canada
2. Recent Global Cat Events: How Could These Influence Canada’s Models?
3. Modeling Changes Going Forward
Recent Global Cat Events: How Could They Affect Canada’s 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
ValdiviaM9.51960
ChillánM8.31939
TalcaM8.31928
SantiagoM8.01985
1935 1939 1960 1985
Código civil chileno de construcción
Recent Global Cat Events: How Could They Affect Canada’s 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
Recent Global Cat Events: How Could They Affect Canada’s 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
EURASIAN OKHOTSK
Recent Global Cat Events: How Could They Affect Canada’s 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
Contents
1. History of Catastrophe Models and Usage in a Canada
2. Recent Global Cat Events: How Could These Influence Canada’s Models?
3. Modeling Changes Going Forward
Contents
1. History of Catastrophe Models and Usage in a Canada
2. Recent Global Cat Events: How Could These Influence Canada’s Models?
3. Modeling Changes Going Forward
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
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
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 company’s 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
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
Contents
1. History of Catastrophe Models and Usage in a Canada
2. Recent Global Cat Events: How Could These Influence Canada’s Models?
3. Modeling Changes Going Forward
Contents
Questions?
Contents
Thank You!
Paul Cutbush | Aon Benfield Canada ULC Catastrophe Management | Aon Benfield Analytics 150 King Street West, Suite 1900 | Toronto, Ontario M5H 1J9 t: +1.416.598.7364 | m: +1.416.587.4606 | f: +1.416.979.7724
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