Chief Research Officer, RMS
Robert Muir-Wood works to enhance approaches to natural catastrophe modeling, identify models for new areas of risk, and explore expanded applications for catastrophe modeling. Recently, he has been focusing on identifying the potential locations and consequences of magnitude 9 earthquakes worldwide. In 2012, as part of Mexico's presidency of the G20, he helped promote government usage of catastrophe models for managing national disaster risks. Robert has more than 20 years of experience developing probabilistic catastrophe models. He was lead author for the 2007 IPCC 4th Assessment Report and 2011 IPCC Special Report on Extremes, is a member of the Climate Risk and Insurance Working Group for the Geneva Association, and is vice-chair of the OECD panel on the Financial Consequences of Large Scale Catastrophes. He is the author of six books, as well as numerous papers and articles in scientific and industry publications. He holds a degree in natural sciences and a PhD in Earth sciences, both from Cambridge University.
Catastrophe models, conceived in the 1970s and created at the end of the 1980s, have proved to be a “disruptive technology” in reshaping the catastrophe insurance and reinsurance sectors. The first wave of disruption saw the arrival of fresh capital, to found eight new “technical” Bermudan catastrophe reinsurers. The “Class of 1993” included Centre Cat Ltd., Global Capital Re, IPC Re, LaSalle Re, Mid-Ocean Re, Partner Re, Renaissance Re and Tempest Re. Using catastrophe models, these companies were able to set up shop and price hurricane and earthquake contracts without having decades of their own claims history. While only two of these companies survive as independent reinsurers, the legacy of the disruption of 1993 is Bermuda’s sustained dominance in global reinsurance.
A second wave of disruption starting in the mid-1990s saw the introduction of catastrophe bonds: a slow trickle at first but now a steady flow of new structures, as investors who knew nothing about catastrophic loss came to trust modeled risk estimates to establish the bond interest rates and default probabilities. Catastrophe bonds have subsequently undergone their own “Cambrian explosion” into a diverse set of insurance-linked securities (ILS) structures, including those in which the funds go back to supplement reinsurer’s capital. Again, this disruption in accessing novel sources of pension and investment fund capital would have been impossible without catastrophe loss models.
The islands of the Caribbean have a problem. The air and earth around them is unforgiving. They are some of the most hazardous places on the planet.
What makes many of these islands so beautiful and dramatic also reflects the catastrophic processes that have built the terrain — the earthquakes, eruptions, floods, and landslides. And these catastrophic processes in turn affect the island economies.
“Investing in mitigation action to reduce disaster consequences shows benefits relative to costs multiplied by a factor of X — where X maybe four or seven, or some other number as high as 15.”
As most simply expressed in 2011 by Tom Rooney, U.S. Congressman for Florida’s 17th District “For every US$1 spent on mitigation, US$4 in post-storm cleanup and rebuilding is saved.” And you may have thought — I wonder how they calculated that? But then life is too busy to go into the details, and the statement — that investment in actions to reduce risk shows a fourfold (or sevenfold) reduction in the cost of disasters is very compelling. It implies you could go out and raise the height of a flood wall or strengthen your house and after a few years you would reap a reward in significantly reduced losses.
Was Hurricane Irma in Florida a fire drill for the insurance-linked securities (ILS) and collateralized reinsurance markets — or was this the real thing? In terms of losses, what happened is at the lower end of what the Irma loss in Florida could have become. But what if some of the stuffing had not been knocked out of the storm in Cuba, and if Irma had landed on either the east or west Florida coasts instead of lumbering into the Everglades?
If Irma was a fire drill, then one topic it has highlighted is that faced by “trapped collateral”.
The mass production of the internal combustion engine facilitated many new kinds of insurable damage and loss. It also provided opportunities to extend and expand older forms of crime. Before cars, robbers were reduced to committing burglary within their own town or village, potentially aided by a speedy horse. Cars took these crimes to a new level. Cars facilitated “smash-and-grab” raids on banks, and kidnap and ransom, grabbing the unfortunate victim on the street and hustling them into the back of the car. Cars facilitated rapid getaway after any kind of attack, whatever the motivation — sabotage, vandalism, revenge. And that is before all the causes of loss associated with cars themselves, such as hit-and-run, manslaughter, dangerous driving, or speeding.
The term “car crime” relates specifically to the robbery of the car or its contents, or otherwise damaging the car — we would not consider lumping together all these different ways in which the car has facilitated losses and crimes under a single heading.
So why does it make sense to lump together all those varieties of crime and loss facilitated by another quantum leap in communications, through computing and the Internet? Because that is what we currently do when it comes to the use of the catch-all term “cyber”.
Although tragic for everyone involved, some good can come from a devastating disaster as it does provide a unique opportunity to transform the building stock, and to “build back better”. Typically, many structures will have been demolished, or need to be removed. There will also be funding, whether it is via insurance payments, assistance grants and even international aid, to help support improvements. From an island in the Caribbean to a city in central Mexico, we could now institute these profound upgrades, so that for any repeat earthquake or hurricane, the damage and losses will be much reduced. Ironically, a disaster creates the best of all times to make improvements.
When we set out to design the latest generation RMS High Definition (HD) flood loss models we identified five key challenges:
a) Resolution: Neighboring properties separated by a few feet in elevation can have dramatically different flood risk costs. However, the finer the model resolution, the bigger the hazard and loss files — and the slower the modeling. We needed an objective way of determining the best trade-offs around model resolution.
b) Duration: Once groundwater levels are raised, more precipitation can set off another round of flooding. The climatology can persist, bringing;
a succession of storms on the same path, or
a fixed long lasting atmospheric river, or
a procession of rain bands from a stalled circulation parked at the coast as from Hurricane Harvey.
Flooding episodes can endure for days and weeks, but reinsurers want a predetermined definition of event duration. The model needed to provide the flexibility to explore how event duration affects results.
Imagine you are a government minister responsible for disaster response. Five days have passed since the hurricane hit your country, and the floods have still not receded. Tens of thousands of your citizens have been made homeless. In the eyes of the people, the government is simply moving too slowly, and the press is baying for action. There is some reassurance though, as you know that over many years your country has paid premium into an international pooling scheme designed to provide substantial funds quickly when such a disaster strikes, to help pay some of the costs of recovery.
But then you hear from the regional multi-state insurance pool to which your finance minister has been contributing hard-fought annual premiums for the past decade. Your country is not going to receive a pay-out. In the scheme’s parametric formula, the value is below the threshold. You have discovered the toxic politics of basis risk.
The second Mexico multi-cat securitization was launched at the end of 2012 to provide reinsurance for the Fund for Natural Disasters (FONDEN) – established by the Mexican federal government as a disaster fund for the poor, which also finances disaster-damaged infrastructure. This three-year bond had a series of tranches covering earthquake or hurricane, each to be triggered by parametric “cat-in-a-box” structures. For one hurricane tranche, this was based on the central pressure of a storm passing into a large “box” drawn around the Pacific coasts of Mexico and Baja California, with the length of the box spanning well over a thousand miles. With a “U.S. National Hurricane Center (NHC) ratified” hurricane central pressure in the box of 920 millibars (mb) or lower there would be a 100 percent payout or $100 million; for a central pressure of 932 mb to 920 mb a 50 percent payout of $50 million.
For Texas, it all began with Hurricane Ike in 2008. In the run-up and during the global financial crisis, between September 2006 and the last quarter of 2008, 780,000 jobs disappeared in the U.S. construction sector. Following Ike, with its generally modest levels of damage across a wide area, “two men in a pickup” teams turned up to get homeowners to sign “Assignment of Benefits” (AOB) forms. A signed AOB form gave repairers responsibility for dealing with the insurer over the claim, and the right to pass the case onto a lawyer assembling a class action lawsuit.
The original idea of contractors sourcing AOBs may have emerged after the 2004-2005 hurricanes in Florida, when lawyer Harvey V Cohen of Cohen Grossman met with restoration contractors to encourage them to employ “Assignment of Benefits” forms so they would deal directly with the insurance company for their payments.