Monthly Archives: July 2014

Building Better Models Through Collaboration

To calibrate and validate their models, catastrophe modeling firms ideally have access to large amounts of high-quality, high-resolution claims and exposure data. But the insurance industry has so much to offer than just data.

In addition to exposure data, insurance companies have detailed knowledge of the claims practice itself, the exact policy wording in the underlying exposure, and local expertise. In addition, many insurance companies today have highly experienced teams of scientists that evaluate vendor cat models, or build their own models in-house.

At RMS, our approach to building models has evolved in recent years to capture the insurance industry’s expertise and insight. At the start of a project, we strive to create partnerships with interested clients or companies to ensure we are aligned with market needs. These technical collaborations usually last for the duration of the model development process, and involve regular technical exchanges between RMS and partners to share methodologies and data sources. The exposure and claims data analysis becomes just one part of this broader initiative.

Over the past two years, we has been extremely fortunate to collaborate with two of Japan’s largest primary insurers, Tokio Marine and Sompo Japan, on the development of RMS’ earthquake and typhoon models for Japan.

Collaboration was in full force this June, when RMS’ typhoon modelers met with Hajime Sano, Head of Catastrophe Analytics, Sompo Japan, and his team in Tokyo for a day of technical discussions around hazard and vulnerability. The Sompo modeling team provided interesting ideas around open modeling features within the new model in order to better create their own view of risk.

Hajime Sano also joined us at our Exceedance conference in April as a featured guest speaker. At the event he explained why Sompo Japan develops in-house models, and why they decided to collaborate with RMS on the RMS Japan Typhoon Model update.

Tokio Marine in RMS London Office

At the end of June, Yuki Mizota from Tokio Marine Nichido Fire Insurance and Mizuki Shinohara from Tokio Marine & Nichido Risk Consulting visited our RMS London office. Yuki Mizota gave a very insightful presentation on the market conditions in Japan, and we had a number of productive discussions around exposure, hazard, and vulnerability.

Tour along Arakawa River

One highlight of the collaboration so far with Tokio Marine was a tour along the Arakawa river in Tokyo. During the visit we were able to see firsthand weak spots in the river defense system and witness the new super levees.

Such firsthand intelligence and data is vital in building a strong flood model. We conducted additional research leading to a much deeper understanding of the importance and state of the river defenses in Japan.

Partnerships with Tokio Marine and Sompo Japan

Our partnerships with Tokio Marine and Sompo Japan are great examples of what can be achieved when we work closely with clients to develop and update models. For us and our partners, this collaborative thinking is a win-win: the partner gains deeper insight into RMS modeling methodologies, a key element of their overall enterprise risk management, and RMS is able build better models based on the best science, the best data, and the additional expertise of local insurers. The industry as a whole benefits from state-of-the-art, well-calibrated models built collaboratively by some of the best minds across the insurance community.

 

Rammasun is One of the Strongest Typhoons to Hit Southeast China in Recent Years

RMS closely monitored typhoon Rammasun last week as it picked up strength en route to the Philippines. The world also watched, remembering the catastrophic damage typhoon Haiyan caused last November. While Rammasun did not wreak as much havoc as Haiyan, it still left a trail of damaged buildings and flooded crop fields in the Phillipines, southeast China and Vietnam. Below, RMS looks at the property damage and insurance industry implications as the typhoon hit both denser commercial metropolitan areas and agricultural provinces.

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RMS reports that on Friday, July 19 Super typhoon Rammasun, one of the strongest to hit southeast China in recent years, made three landfalls in the provinces of Hainan, Guangdong, and Guangxi.

Rammasun has significantly impacted the Philippines, southeast China and Vietnam. Rammasun brought strong winds, heavy rain, and storm surge to some coastal areas with close to 300,000 buildings damaged in the affected countries.

In China, damaging wind and floods have destroyed at least 37,000 homes and ravaged 468,500 hectares of crops in Hainan, Guangdong and Guangxi provinces. Virtually all brick-and-tile houses in the town of Wengtian, Hainan were either destroyed or had their roofs removed. Within a 24 hour period up to 15 inches of rain fell in the city of Haikou; the week before Rammasun hit, the southeastern provinces were reportedly experiencing heavy floods, which have only been exacerbated by the typhoon.

“Typhoon-related flood, which includes both rainfall driven and coastal flooding, contributes as much as 80% to typhoon average annual loss in China, with the coastal provinces driving the loss,” said Nikki Chambers, hazards scientist at RMS. “July to October are the most active months for typhoons in this region. On average 6 typhoons make landfall a year in China and typhoon Rammasun highlights the importance of accounting for all sources of typhoon losses, of which flood is the main driver.” Insurance penetration is extremely low in China particularly for residential risk, slightly higher for commercial and industrial lines of business. On average, about 15% of property risk in China is insured. Insurance penetration varies by province; Hainan has one of the lowest insurance penetrations in China. Guangdong is one of the more prosperous provinces; it is the second largest province for property insurance purchases, with 41.7 billion yuan (US$6.8 billion) in direct premiums for property insurance in 2012, according to the China Insurance Regulatory Commission.

Philippines

The typhoon wreaked havoc earlier in the week in the northern Philippines, which is still rebuilding after Typhoon Haiyan. Rammasun made its first landfall in the largely agricultural provinces south of the capitol Manila, leaving 94 people dead, and over 111,000 houses damaged, of which nearly 28,000 have been totally destroyed and 83,000 have been partially damaged., Based on analysis from the RMS Philippines Economic Exposure Database, the impacted provinces in the Philippines from Rammasun contains over 100 bn USD of insurable commercial building exposure, 80 bn USD of industrial building insurable exposure, and over 215bn USD of residential building exposure. Based on the RMS Philippines industrial cluster catalog, industry is clustered around metro Manila and in areas to the north and south of the capital in Central Luzon, which are located within the affected area of Rammasun. The insurance penetration rates in the Philippines is relatively low, though higher for commercial and industrial lines of business and will be centred around Manila and the industrial zones.

Vietnam

In northern Vietnam, Typhoon Rammasun made landfall Saturday morning, causing heavy flooding. At least eight people have died and it has affected more than 6,000 homes. The typhoon has damaged 3,300 hectares of rice and other crops and disrupted traffic in the region. Typhoon, Matmo, with maximum winds of 150km/h, is now threatening the area ravaged by Rammasun. RMS is monitoring the situation closely.

Dueling Agendas on TRIA

On Thursday, July 17, the Senate passed a reauthorization of TRIA, the Terrorism Risk and Insurance Act, extending the bill for seven years after its expiration at the end of 2014. The bill was passed with a 93-4 vote and made minor modifications to the expiring legislation. This is a promising sign for the insurance industry, which has been lobbying vigorously for a renewal since last year. But before the bill becomes law, there is certain to be opposition from influential members of Congress who favor more significant reductions to the federal government’s participation.

The Senate bill reduces TRIA’s coverage in two key ways: by increasing the industry co-pay from 15% to 20% over a five year period, and by pushing the Federal Government’s “mandatory recoupment” responsibility from $27.5 billion to $37.5 billion. By contrast, a competing bill proposed by Congress calls for even more substantial modifications, most notably raising the program trigger from $100 million to $500 million for all acts of terrorism except those arising from CBRN (chemical, biological, radiological, and nuclear) events.

How the two bills are reconciled will have significant implications for the insurance industry, as any reduction in federal participation will amount to additional risk assumed by insurance carriers. However, property insurers today are more willing to take on terrorism risk that they would have previously excluded, as evidenced by the dramatic drop in terrorism insurance prices over the past decade. A recent study by the Wharton Center for Risk Management downplayed the impact of TRIA changes, noting that while the changes could increase the price of coverage, “firms’ demand for terrorism insurance is not very sensitive to gradual price changes under current market conditions.”

Whatever the case, the ultimate outcome of the TRIA will have a measurable impact on the price and availability of terrorism insurance, primary carriers’ risk appetites in urban areas, and the securitization of terrorism risk, which my colleague Gordon Woo recently wrote about. The U.S. has made great strides in the capability of its counterterrorism operations over the past decade, but even with these gains, insurers and reinsurers must continue managing their pricing, underwriting, and capital deployment strategies to address the risk of future catastrophic acts of terror.

RMS and the FIFA World Cup: Insuring Against Terrorism

As we reflect back on this year’s World Cup, which wrapped up without interruption after Germany’s victory on Sunday, it is clear that FIFA’s financial position is much stronger now than in 2006, due in part to the availability of terrorism insurance.

Eleven years ago, the global elite of the soccer world learned about innovative RMS risk analysis to help FIFA to prepare for the 2006 World Cup in Germany. Sponsorship money was essential for FIFA’s cash flow and sponsors insisted on having insurance coverage against event cancellation. After 9/11, terrorism insurance became a necessity, but was available only through Warren Buffet, the astute insurer of last resort, and was extremely expensive. So, FIFA pursued alternative risk transfer to the capital markets through a catastrophe bond.

FIFA’s bankers at Credit Suisse turned to RMS to do what had been thought impossible – to get a terrorism risk securitization rated. It took multiple RMS meetings with Moody’s in London and New York over the course of a year to present and discuss the unique terrorism risk analysis and eventually secure an investment grade rating for Golden Goal Finance Ltd. This $260 million deal remains to this day the only stand-alone securitization of terrorism risk. Prospects for further terrorism risk securitizations depend on the scope of the U.S. Terrorism Risk Insurance Act, which will be renewed at the end of 2014 with some further incremental reduction in the role of the federal government, but RMS was instrumental in instituting the precursors to these prospects.

Securitization of the cancellation risk of the 2006 World Cup was feasible in part due to the national importance of the event, which received extensive counter-terrorism protection.

While cancellation was still the biggest risk this year, the predominant local threat to the World Cup was disruption by public protest and riot. Following the start of the Arab Spring in 2011, there has been a surge of demand for international riot insurance, with a commensurate interest in riot analysis. As with terrorism, security is particularly crucial for the control of riot risk. With 170,000 Brazilian security personnel on duty for the month of the soccer tournament, insurers were able to enjoy the matches without concern that the July 13 final in Rio would be delayed.

While terrorism insurance is more widely available than in the past, it is still in short supply. Expanding modeling capabilities and increased demand for products such as terrorism and riot insurance will result in more insurance-linked securities (ILS) transactions such as the 2006 catastrophe bond, and ultimately promote a more resilient society.

Trading Risk Awards: ILS Innovation Recognized

In June, RMS had the pleasure of hosting a table at the Trading Risk Awards in London. These annual awards aim to recognize the best of the (re)insurance convergence market: individuals and companies contributing to the advancement of the insurance-linked securities (ILS) industry.

That night three RMS-modeled transactions that came to market in 2013 were given special recognition: Tradewynd Series 2013-2, MetroCat Re Ltd., and Atlas IX Capital Ltd. These three transactions incorporate several noteworthy innovations that promise to shape the future of ILS.

Initiative of the year – A Multi-Model Approach to Catastrophe Bond Risk Analysis

AIG and Swiss Re Capital Markets were awarded “Initiative of the Year” for their multi-model approach to Tradewynd Series 2013-2. This transaction provided a first for the industry by introducing transparency to a typically opaque and restricted risk management process.

Typically, data is only privy to the modeling firm retained to produce the risk analysis included in the offering documentation. On this occasion, while RMS was the main modeling agent for the deal, AIG’s exposure data was supplied to all three modeling firms so that investors had a more accurate representation of the risk of the bond under multiple views.

Not only did investors get the RMS view of commercial and high-end residential risk on this bond, they also got unprecedented insights into the exposures driving the risk. The market reacted favorably to the approach with markedly tighter spreads and larger issuance than the prior Tradewynd bond with a nearly identical risk profile.

Non-Life Transaction of the Year – MetroCat Re Ltd

This groundbreaking surge-parametric transaction received two accolades: the Metropolitan Transportation Authority (MTA) was awarded “Sponsor of the Year,” and the deal itself was proclaimed “Non-Life Transaction of the Year,” recognizing the MTA, GC Securities, and Goldman Sachs for their roles in the transaction.

The MetroCat bond addressed the need for surge-insurance capacity after Superstorm Sandy by providing the MTA with insurance cover based on water levels exceeding certain heights at tide gauges in the New York area. The RMS® North Atlantic Hurricane Model, with its full-lifecycle hydrodynamic modeling capability, was critical in understanding the risk to the transaction. The success of MetroCat Re proves that corporates and municipalities can access capital through ILS, as well as produce transactions that provide much needed surge cover.

Life Transaction of the Year – Atlas IX Capital Ltd.

Aon Benfield Securities, BNP Paribas, Natixis, and SCOR won “Life Transaction of the Year” for Atlas IX Capital Ltd., the highest risk bond of its kind to come to market. For this watershed deal, RMS used its suite of LifeRisks models to provide scenario-based modeling results. This allowed investors to gain greater insight into the risk to the transaction from changing trends in baseline mortality in addition to excess mortality from infectious disease, terrorism, earthquakes, and residual risks.

Congratulations to all the winners. We are delighted to see continued innovation in the market.