Monthly Archives: March 2015

The 2015 U.K. Budget and Terrorism Insurance

On 18 March, the Chancellor of the Exchequer, George Osborne, delivered his pre-election budget. Billions of further public spending cuts are needed. Several weeks earlier, Pool Re, the U.K. terrorism insurance pool, announced its first ever purchase of reinsurance in the commercial market.

These two announcements are not unconnected.

Pool Re was set up in 1993, after the IRA bombing of the Baltic Exchange in 1992. Since the pool was established, it has built up quite a substantial surplus; claims have been low thanks to the vigilance of the security and intelligence services. Almost all the major plots since the September 11, 2001 attack have been foiled.

Terrorism insurance is effectively insurance against counter-terrorism failure, and the huge sums spent on blanket indiscriminate surveillance have helped to minimize terrorism insurance losses. The low level of losses is not coincidental, or due to some unpredictable whim of terrorist behavior but readily explainable; too many terrorists spoil the plot. The type of plots capable of causing terrorism insurance losses of a billion pounds or more would involve a sizeable number of operatives.

As the NSA whistleblower Edward Snowden has revealed, the level of surveillance of electronic communications is so intensive that sizeable terrorist social networks end up being tracked by NSA and GCHQ. Lesser plots involving lone wolves or several operatives are most likely to be successful. A string of these have struck the western alliance over the past months in Ottawa, Sydney, Paris, and Copenhagen. Besides causing terror, these have attracted global media publicity, inspiring Jihadi recruitment. But terrorism insurance covers property loss, not the spread of fear or growth in the ranks of Islamic State.

Having developed a tough security environment, it is unsurprising that the U.K. Government should be questioning its continuing exposure to terrorism insurance risk. This is an age of austerity. Pool Re’s three year program provides £1.8bn of reinsurance cover, so diminishing this exposure. More cover might have been purchased, but this was the market limit, given that Chemical-Biological-Radiological-Nuclear (CBRN) risks were included.

The idea of separating out extreme CBRN terrorism risks was considered in Washington by the House Financial Services Committee in the discussions last year over the renewal of the Terrorism Risk Insurance Act. The objective was to provide a federal safety net for such extreme risks, whilst encouraging further private sector solutions for conventional terrorist attacks. This idea was considered at some length, but was a step too far for this TRIA renewal. It might be a step for Pool Re.

The modus operandi of the IRA was to avoid killing civilians. This would alienate their Catholic community support. Bomb warnings, genuine and hoax, were often given. Thus the metric of IRA attacks was typically physical destruction and economic loss. Islamist militants of all persuasions have no such qualms about killing civilians. Indeed, gruesome killings are celebrated. Terrorists follow the path of least resistance in their actions. For Islamic State, this is the path of brutal murder rather than property damage.

Winter 2015: A Season to Remember (or Forget)

This winter has brought a barrage of storms and Arctic air to more than half of the U.S., notably the New England region, resulting in record amounts of snow, sleet, freezing rain, and bitterly cold temperatures.

Arguably, no other major city has been more directly impacted than Boston, Massachusetts. As of March 9, the city has received 105.7 inches of snow this season – over three times the average seasonal total for the region! It’s the second snowiest season on record, behind only the 1995-1996 season, which brought 107.6 inches of snow. Further, February 2015 marks the snowiest month reported (more than 60 inches) and the second coldest February on record.

Damage reports from this season’s snowstorms include roof collapses, building collapses, burst pipes, power outages, and business interruption. The Massachusetts Emergency Management Agency reported more than 160 collapsed buildings or buildings at risk of collapse since February 9 with damage mainly driven by dense snow pack and strong winds. As of February, Boston has already spent a record $35 million on snow removal – almost double the allotted total of $18.5 million.

U.S. Winterstorm Risk Map. Loss cost per $1000 for Residential lines at the ZIP code level, based on RMS U.S. Winterstorm Model output using the RMS 2011 U.S. Winterstorm IED.

Businesses and supply chains have been interrupted as well. A combination of snowstorms, cold weather, and ice has closed thousands of businesses, resulting in lost wages for hourly workers. These events have disrupted all forms of travel, restricting trucks and air freight from reaching their destinations and leading to increased prices for certain goods.

All in all, these types of impacts can result in significant economic and insured damages. According to a study by IHS Global Insight, a one-day snow-related shutdown would cost some states as much as $300-700 million in economic losses.

Insured loss estimates from the cluster of February storms (five in total) that swept through parts of the Ohio Valley, Mid-Atlantic, and Northeast are likely to exceed $1 billion, which is in line with annual averages. RMS model analysis shows that on average, about $2-3 billion in U.S. annual insured losses are caused by winter storms, which can produce a combination of snow, ice, freezing rain, and frigid temperatures. This is about 5-10% of the overall U.S. average caused by perils including hurricanes, severe convective storms, floods, and winter storms.

Whether it is in regards to the harsh winters of the last few years or future winters to come, it is important for the (re)insurance industry to be adequately prepared so insured losses remain at a minimum.

The Journey to Sendai and Beyond

Sendai is a city of a million people 2 hours north of Tokyo on the Shinkansen bullet train. From March 14-17, 2015 it will attract seven thousand people to the 3rd UN World Conference on Disaster Risk Reduction (WCDRR). Twelve heads of state (including one king and one emperor), seven prime ministers and 135 ministers and vice ministers, will be present to launch a fifteen year program of coordinated action around disaster risk reduction.

The conference is being hosted in Sendai because of the city’s recent experience of a mega-catastrophe. Just four years after the great Tohoku earthquake and tsunami in March 2011 and the coastal villages adjacent to Sendai still bear the scour marks where the great tsunami surged inland through the pine forests, removing many buildings off their foundations.

The original International Decade for Disaster Risk Reduction ran from 1990-1999. The second decade from 2005-2015, renewed at Kobe ten years after its devastating 1995 earthquake, was called the Hyogo Framework for Action. The continuation of this international program is currently designed to last for fifteen years. The fact that the frameworks have been renewed reflects reality—while there have been successes for particular regions and perils, the broader goals of worldwide disaster risk reduction have not been met. For example, the 2011 Tohoku earthquake was not anticipated, and as a result had grievous consequences in terms of loss of life and damage to the Fukushima nuclear power plants.

RMS will have four people at the Sendai WCDRR conference. We have obtained a coveted presentation on the main IGNITE stage—the equivalent to a “TED talk.” I will also be speaking on two panel sessions, one organized by The Geneva Association and Tokio Marine, “Insurance as contributors to problem solving and impact reduction,”and a second on the launch of the global set of catastrophe models developed by the UNISDR agency, for which RMS has provided high-level input. We have offered to host these worldwide UNISDR catastrophe models on RMS(one), which will open up access to the models for public officials in developing countries.

We have also worked on a couple of papers (for example, ‘Setting, Measuring and Monitoring: Targets for Disaster Risk Reduction: Recommendations for post-2015 international policy frameworks’) articulating how to measure progress in disaster risk reduction. At present, international frameworks have shied away from setting numerical commitments. We have argued that only probabilistic methods, which simulate thousands of possible events, can show baseline levels of risk, what actions will achieve progress, and whether targets have been achieved. We take Michael Bloomberg’s quote from the foreword to the Risky Business report: “if you can’t measure it, you can’t manage it.”

The work by the UNISDR on catastrophe modeling highlights the accelerated recognition of the role of modeling in managing and reducing disaster risk. There is now a real focus on public-private partnerships in achieving disaster reduction. With RMS’ rich and deep experience in catastrophe modeling, there is much we can offer to these expanded applications. For users of models in governments, public organisations and NGOs, models are required to:

  • explore how to manage a wide range of potential disasters
  • perform cost benefit analyses of alternative actions to reduce risk of loss of life or economic impacts
  • explore potential implications of climate change
  • explore holistically the potential for significant financial shocks to national economies

If you are attending the conference, come and visit us at our booth on the 6th floor of the Sendai International Center where we will be distributing information about our proposals for disaster risk modeling, and articulating our role as leaders in catastrophe risk modeling. It will be a highly publicized event with 500 journalists and around 300 private sector members, including several of our key clients. We will also be meeting with other organizations with which we are affiliated, including the UN Principles for Sustainable Insurance and the Rockefeller Foundation’s 100 Resilient Cities initiative.

We look forward to sharing more insight after the event.

Rising Storm Surge Losses in the U.S. Northeast

Co-authored by Anaïs Katz and Oliver Withers, analysts, Capital Market Solutions, RMS

A recent article in Nature Communications, picked up by the BBC, identified a record mean sea-level rise of 5” (127mm) along the coastline north of New York City during 2009-10. Sea levels fluctuate between years; a swing of this size, however, was unprecedented.

This extreme rise in 2009-2010 has been attributed to the downturn of a major current called the Atlantic meridional overturning circulation (AMOC). As changes to sea levels are sensitive to multiple factors, there is volatility around this increase. The AMOC is one of the ocean’s dynamics that is known to have greatly changed over time. It has been shown that weakening and variation of the AMOC is linked to increases of greenhouse gas emissions.

Sea level rise is one of the most tangible and certain consequences of a warmer climate. Climate models suggest that even if greenhouse gas emissions were reduced sea levels will continue to increase. Such a dramatic fluctuation, as seen in 2009-10, highlights the potential for significantly elevated storm surge risk in the region and raises the question what will the impact of future long-term sea-level rise have on storm risk.

A study by Kopp et al. has attempted to predict probability bands for sea rise. The figure below shows the distribution of expected sea-level rise at New York City’s Battery Park throughout the 21st century. The 50th percentile projection of sea level rise is represented as the red line in the figure. Also shown are the maximum rises in sea levels associated with previous hurricane storm surges.

Based on RMS’ estimate of the impacts from hurricanes on residential and commercial property in the Northeast US (from New Jersey north), the 2010 estimate of storm surge contribution to hurricane losses is about 10%. Even where the activity of hurricanes does not change, sea level rise will increase the damage associated with hurricane storm surges. Based on Kopp’s estimates of sea level rise, by 2100 surge losses would contribute about 25% of total hurricane losses.

The largest recent hurricane loss occurred on October 29th 2012, when Superstorm Sandy made landfall near Atlantic City, NJ. Based on the RMS best loss estimate, Sandy caused insured losses between $20 and $25 billion, with much of the damage due to storm surge, not wind.

In terms of a simple extreme value analysis, the storm surge caused by Superstorm Sandy combined with the tide at New York City’s Battery Park was approximately a 1-in-450 year return period for that location. Based on sea level rise alone, this surge and tide combination at this location would move closer to a 1-in-100 year event by the end of the century. The figure below shows the return periods for a storm surge as high as Sandy’s occurring at New York City’s Battery Park, under different sea-level assumptions.

A direct result of increasing amounts of greenhouse gases in the atmosphere will be an increase in sea surface temperatures. While increased sea surface temperatures are likely to cause changes to the activities and intensities of hurricanes, there is no consensus among climate modelers as to the magnitude and direction of these changes. For this reason, the figure below does not consider potential changes in hurricane activity, but focuses solely on sea-level rise, for which there is much more of a general agreement.

While the impacts of climate change remain much debated, changes in loss potential will have material effects on the risk to insurers. With the appreciation of the significance of climate change coming to the fore, the next decades will pose a research challenge for the insurance industry, as to how to incorporate evidence for changes in the level of risk.

This post was co-authored by Anaïs Katz and Oliver Withers. 

Anaïs Katz

Analyst, Capital Market Solutions, RMS
As a member of the advisory team within capital market solutions, Anaïs works on producing capital markets’ deal commentary and expert risk analysis. Based in Hoboken, she provides transaction characterizations to clients for bonds across the market and supports the deal team in modeling transactions. She has woked on notable deals for clients such as Tradewynd Re and Golden State Re. Anaïs has also helped to model and develop her group’s internal collateralized insurance pricing model that provides mark to market prices for private transactions. Anaïs holds a BA in physics from New York University and an MSc in Theoretical Systems Biology and Bioinformatics from Imperial College London.

Measuring Disaster Risk for Global UN Goals

A dispiriting part of the aftermath of a disaster is hearing about the staggering number of deaths and seemingly insurmountable economic losses. Many of the disaster risk reduction programs that implement disaster prevention and preparedness capabilities are helping to create more resilient communities. These worthwhile programs require ongoing financing, and their success must be measured and evaluated to continue to justify the allocation of limited funds.

There are two global UN frameworks being renewed this year:

Both frameworks will run for 15 years. This is the first time explicit numerical targets have been set around disaster risk, and consequently, there is now a more pressing need to measure the progress of disaster risk reduction programs to ensure the goals are being achieved.

The most obvious way to measure the progress of a country’s disaster risk reduction would be to observe the number of deaths and economic losses from disasters.

However, as we have learned in the insurance industry in the early 1990s, this approach presents big problems around data sampling. A few years or even decades of catastrophe experience do not give a clear indication of the level of risk in a country or region because catastrophes have a huge and volatile range of outcomes. An evaluation that is purely based on observed deaths or losses can give a misleading impression of success or failure if countries or regions are either lucky in avoiding (or unlucky in experiencing) severe disaster events during the period measured.

A good example is the 2010 Haiti earthquake, which claimed more than 200,000 lives and cost more than $13 billion. Yet for more than 100 years prior to this devastating event, earthquakes in Haiti had claimed fewer than 10 lives.

Haiti shows that it is simply not possible to determine the true level of risk from 15 years of observations for a single country. Even looking at worldwide data, certain events dominate the disaster mortality data, and progress cannot be measured.

Global disaster-related mortality rate (per million global population), 1980–2013 (From Setting, measuring and monitoring targets for disaster risk reduction: recommendations for post-2015 international policy frameworks. Source: adapted from

A more reliable way to measure the progress of disaster risk reduction programs is to use a probabilistic methods, which rely on a far more extensive range of possibilities, simulating tens of thousands of catastrophic events. These can then be combined with data on exposures and vulnerabilities to output metrics of specific interest for disaster risk reduction, such as houses or lives lost. Such metrics can be used to:

  • Measure disaster risk in a village, city, or country and how it changes over time
  • Analyze the cost-benefit of mitigation measures:
    • For a region: For example, the average annual savings in lives due to a flood defense or earthquake early warning system
    • For a location: For example, choosing which building has the biggest reduction in risk if retrofitted
  • Quantify the impact of climate change and how these risks are expected to vary over time

In the long term, probabilistic catastrophe modeling will be an important way to ensure improved measurement and, therefore, management of disaster risk, particularly in countries and regions at greatest risk.

The immediate focus should be on educating government bodies and NGOs on the valuable use of probabilistic methods. For the 15 year frameworks which are being renewed this year, serious consideration should be given on how to implement a useful and practical probabilistic method of measuring progress in disaster risk reduction, for example by using hazard maps. See here for further recommendations: 

2015 is an important year for measuring disaster risk: let’s get involved.