managing man-made catastrophe risk: a market perspective cas special interest seminar on catastrophe...

Managing man-made catastrophe risk:A market perspective

CAS Special Interest Seminar on Catastrophe Risk Management

Atlanta, 7 October 2002

Thomas HolzheuSwiss Re

Thomas Holzheu“Managing man-madecatastrophe risk”7 October 2002

Figure 2

Catastrophe Events 1970 – 2001

# catastrophes

Source: sigma 1/2002

0

50

100

150

200

250

70 75 80 85 90 95 '00

Natural catastrophes Man-made disasters


Figure 3

Man-made catastrophes in 2001


# catastrophes

Road/Rail[75]

Mining[18]

Terrorism[4]

other[28]

Fire[40]

Aviation[17]

Shipping [22]


Figure 4

Number of victims 1970 – 2001

# cat victims,logarithmic scale


1,000

10,000

100,000

1,000,000

70 75 80 85 90 95 '00



Figure 5

Insured losses [property only] 1970 – 2001

Insured losses,2001-$ billion


0

5

10

15

20

25

30

70 75 80 85 90 95 '00



Figure 6

Catastrophe Figures (property only)2001 vs. Average

2001 Average1987-2001

Insurance Losses (USD bn)

• Natural Catastrophes World 10.0 14.3USA 8.0 9.1

• Man-Made Events World 24.4 5.9USA 19.9 2.7

• Nat Cat per Peril (World) Storm 7.2 8.9Earthquake 0.6 1.6Flood 0.1 0.8

Fatalities World 33 000 41 000USA 3 451

800Source: Swiss Re, sigma


Figure 7

9/11 consensus loss estimates: 40.2 billion in total

Source: Insurance Information Institute

Property24%

Other Liability

25%

Life7%

Business Interruption

27%Event

Cancellation2%

Workers' Comp

5%Aviation Hull

1%

Aviation Liability

9%


Figure 8

How was terrorism insured?

Historically, fire insurance covered fire and explosion damage regardless of its cause.

Exceptions were war, civil war and civil commotion. Terrorism was not mentioned in war exclusion clauses.

Countries with frequent terrorism experience had special regulations or pool solutions with government support in place (UK, Spain, South Africa and Israel).


Figure 9

The global insurance system passed the stress test

The insurance industry will fulfill their contractual obligations regarding WTC losses.

Insurers didn’t initiate a sell off of stocks.

Global insurance diversification worked. Losses were spread widely between US insurers and global insurers as well as between primary insurers and reinsurers.


Figure 10

Limits of insurability are challenged!

Terrorism risk is hardly quantifiable today, diversification very hard to achieve.

Capital markets don’t like the risk, therefore a very high risk premium is needed to provide cover.

Not only insurers have to learn how to assess and manage the new risk, but also financial analysts and rating agencies have to be educated.

The main problem is the extremely high and unpredictable loss potential --> 40 Bn USD x ??


Figure 11

The number of terrorist attacks in 2001 actually declined!

Source: US Department of State

# attacks

200

300

400

500

600

700

81 83 85 87 89 91 93 95 97 99 01


Figure 12

North-America shows the lowest frequency of terrorism [1996-2001]

Source: US Department of State

# attacks

0

50

100

150

200

Afric

aAs

ia

Eurasia

L. Am

erica

Mid-Eas

t

N. America

W. E

urop

e

969798990001


Figure 13

8 of the 10 most costly terrorism losses occurred in US and UK

Insured loss* Victims Date Event Country

21 000 3054 2001 Terror attack against WTC, Pentagon and other buildings USA

907 1 1993 Bomb explodes in London’s City (near NatWest tower) UK 744

- 1996 Bomb explodes in Manchester UK

725 6 1993 Bomb explodes in garage of WTC USA

671 3 1992 Bomb explodes in London’s financial district UK

398 20 2001 Suicide bombing at Colombo International Airport Sri Lanka

259 2 1996 Bomb attack on London’s South Key Docklands UK

145 166 1995 Bomb attack on government building in Oklahoma City USA

138 270 1988 PanAm Boeing 747 crashes at Lockerbie due to

bomb explosion UK

127 - 1970 Three hijacked passenger airplanes dynamited in Zerga Jordan

*) in USD m, indexed to 2001 , property and business interruption only

Source: Swiss Re, sigma No. 1/2002, Insurance Information Institute


Figure 14

WTC losses reduce the reinsurers’ equity by 10 to 25%

Source: Morgan Stanley, March 28th.

in USD m.

0

500

1000

1500

2000

2500

3000

Lloyd

's

Munich

Re

Berks

hire

Swiss

ReAll

ianz

Aioi

St Pa

ul

Nissa

nAIG

Zuric

h

XL Ca

pital

Hartford

FS Ace

Chub

bTa

isei

GE/Empl.

Re Axa

Citigr

oup

CNA

ING

Partn

er Re

Hann

over

Re RSA

Libert

y Mutu

al

FM Glob

al

Gerlin

gQB

E

Trans

atlan

tic Scor

0%

5%

10%

15%

20%

25%

30%

Current net loss estimate (before tax) Net loss in % of equity (RHS)


Figure 15

”Target” commercial includes: Commercial property, liability and workers’ comp. Sources: A.M.Best, Swiss Re Economic Research & Consulting

Capital Myth: P/C industry has $300 billion to cover terrorism

Surplus 12/2001$289 billion

137

In $ billions

132.0

20.7

97.1

39.6

Personal lines

Commercial"non-target" lines

Commercial"target" lines

Reinsurers


Figure 16

Commercial lines surplus is quite stretched as is

Sources: [1] A.M.Best, [2] Fox-Pitt, Kelton, [3] Morgan Stanley, [4] Swiss Re Economic Research & Consulting

In $ billions

0

25

50

75

100

125

150

175

year end2001

surplus [1]

y-t-dcapital

losses [4]

reservesshortfall[2, 4]

A&Eshortfall?

[3]

freesurplus?

[4]

NPW in2002 [4]

137 -13

-23

-55

46

157


Figure 17

Natural Catastrophe: “Business as

usual”

Man-made: Dealing with the new

Spectre

• 2001 loss burden below average

• upward trend, high fluctuations

• further premium increases necessary

• huge loss potentials persist

• new risk landscape, exploration has

started

• apply experience from other extreme risks

• balance carefully: risk appetite, exposure

control, risk and return

• public-private partnership for a limited

time

Summary


Figure 18

Questions?

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