aon benfield analytics evolution of catastrophe models canadian institute of actuaries seminar for...

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

History of Catastrophe Models and Usage in a Canada

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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

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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

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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


AIR• Founded in 1987• Ranked 2nd in catastrophe modelling firms globally• Currently offers earthquake and severe thunderstorm catastrophe models for 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

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02

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071997 2005

08

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112007

Exposure data update:• EQ• Severe

Thunderstorm

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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)


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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


Contents




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


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


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


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




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


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


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




Contents

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aon benfield analytics evolution of catastrophe models canadian institute of actuaries seminar for...

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