Category Archives: Natural Catastrophe Risk

The 2016-17 Australian Cyclone Season: A Late Bloomer

The 2016-17 Australian region cyclone season will be remembered primarily as an exceptionally slow starter that eventually went on to produce a slightly below-average season in terms of activity.

With the official season running from November 1 to April 30 each year, an average of ten cyclones typically develop over Australian waters with around six making landfall, and on average, the first cyclone landfall is by December 25. For the 2016-17 season, we saw nine tropical cyclones, of which three further intensified into severe tropical cyclones and three of which made landfall, running contrary to an average to above-average forecast from the Bureau of Meteorology.

The bureau’s preseason outlook, released in October 2016, was primarily based upon the status of the El Niño Southern Oscillation (ENSO). Neutral to weak La Niña conditions in the tropical Pacific Ocean and associated warm ocean temperatures in Northern Australia were expected to persist through the season. During La Niña phases, there are typically more tropical cyclones in the Australian region, with twice as many making landfall than during El Niño years on average.

Additionally, such La Niña conditions typically lead to the first crossing of a tropical cyclone coming more than two weeks earlier in the year than the climatological average. These conditions meant that probabilities were in favor of increased tropical cyclone activity in the basin, with the first tropical cyclone expected to make landfall in Australia during December.

The Latest First Cyclone Landfall in Australia on Record

For the 2016-17 season, this was not the case as during the first four months of the season (November-February), a mere two tropical lows developed into cyclones (Yvette and Alfred). Cyclone Blanche set the record for the latest first cyclone landfall in Australia, which on March 6 crossed the northern coast of Western Australia as a Category 2 storm on the Australian tropical cyclone intensity scale.

What caused this slow start? The oceanic conditions were largely favorable, but the right atmospheric conditions rarely came together for cyclone formation. Warmer than average sea surface temperatures contributed to an early onset and highly active Australian monsoon season. The monsoon trough, a broad region of low pressure associated with tropical convergence and convection, was located much further south than usual, positioning the large scale rising motion needed for tropical cyclone formation on or near land, inhibiting the potential for cyclogenesis.

Where tropical lows did form over open water, they often struggled to intensify due to persistent moderate to high wind shear, only developing when the system drifted into lower shear environments over land. This resulted in so called “landphoons”, supercell thunderstorms whose radar signature resembles that of a tropical cyclone, which brought light winds but heavy rains. These systems resulted in an extremely wet Australian monsoon season with total rainfall in the Northern Territory 48 percent above average, the eighth highest on record.

This pattern of low cyclone activity early in the season was not only seen in the Australian region but across the whole Southern Hemisphere, with sinking air in the cyclone-forming regions of the south Indian Ocean and the southwestern Pacific. The hemisphere saw over 280 days without a hurricane-strength tropical cyclone, the longest period on record. For February 26, 2017, normally near the peak of the Southern Hemisphere cyclone season, total accumulated cyclone energy (ACE) was just 14 percent of the climatological average over the same period.

An Active End to the Season

Then, in contrast to an absence of severe tropical cyclones for the first four months of the Australia cyclone season, the region experienced three within March and April; enter Debbie, Ernie, and Frances.

Season summary map showing the tracks and intensity (Saffir-Simpson Hurricane Wind Scale, SSHWS) of all named tropical storms which reached at least tropical storm classification according to the JTWC during the 2016-17 Australian region cyclone season

Season summary map showing the tracks and intensity (Saffir-Simpson Hurricane Wind Scale, SSHWS) of all named tropical storms which reached at least tropical storm classification according to the JTWC during the 2016-17 Australian region cyclone season

Of these three, Severe Tropical Cyclone Debbie was the most damaging, making landfall on March 28 near Airlie Beach, Queensland as a Category 4 storm on the Australian scale, with PERILS estimating that insured property market loss will reach AUD$1.1 billion (US$802 million) from this event.

Following Debbie in early April was Severe Tropical Cyclone Ernie. Although Ernie did not impact on land, it was the first Category 5 cyclone (Australian scale) in the Australian region since Cyclone Marcia in February 2015 and was notable for its explosive intensification, escalating from a tropical low to a Category 5 severe tropical cyclone in just 24-30 hours.

Such cyclones act as a reminder that a quiet start to the season is not necessarily indicative of what is to come, with intense cyclones possible until the end of the season and even beyond. On May 7, Cyclone Donna in the South Pacific became the strongest Southern Hemisphere tropical cyclone in the month of May on record, when it rapidly intensified into a Category 4 storm (Saffir-Simpson Hurricane Wind Scale) as it bypassed north and west of Vanuatu. Donna damaged more than 200 buildings on the islands, proving damaging cyclones are possible even after a cyclone season has officially finished.

Ultimately, Severe Tropical Cyclone Debbie will be the storm remembered from the 2016-17 Australian Cyclone Season and a follow up blog examining this event will be published in early June.

RMS is targeting an update to the Australia Cyclone model for release in 2018 that will utilize the latest information from recent cyclone seasons, incorporating new Bureau of Meteorology data inclusive of the 2016-17 season and add several recent historical storms, including Cyclone Debbie, to the event set.

Potential Implications for the Atlantic

Despite the active end to the season, ACE in the Southern Hemisphere remains over 50 percent below average at 96 (104 kt2). Interestingly, in years where Southern Hemisphere ACE is below 200, the Atlantic typically also has a quiet season, averaging an ACE of just 77 compared to the 1981-2010 average of 104, although there have been notable exceptions such as in 1995.

The RMS 2017 North Atlantic Hurricane season outlook will provide more details on what is likely to be expected from the upcoming Atlantic hurricane season and is due to be published in June with an accompanying blog post.

The California Earthquake Authority (CEA) and RMS Co-host Webinar to Share Insights on California Earthquake Risk Using North America Earthquake Version 17.0

Together with the California Earthquake Authority (CEA), RMS co-hosted a webinar on May 17 for the CEA’s global panel of catastrophe reinsurers to explore how new earthquake science and RMS modeling impacts the CEA and its markets. The CEA is one of the largest earthquake insurance programs in the world with nearly one million policyholders throughout California. In the webinar, we analyzed and shared insights about the risk to the CEA book using the new Version 17 RMS North America Earthquake Models which was just released on April 28.

The new RMS model, representing over 100 person-years of R&D, incorporates significant new developments in earthquake science and data over the past decade, including the new U.S. Geological Survey (USGS) seismic hazard model which introduced the Uniform California Earthquake Rupture Forecast Version 3 (UCERF3). The new RMS model also incorporates the Pacific Earthquake Engineering Research Center’s (PEER) new ground motion predictions equations referred to as the Next Generation Attenuation Functions for Western U.S. Version 2 (NGA-West2, 2015). This leverages six times more ground motion recordings (21,332 versus 3,551 to be exact) across almost 4,150 stations, compared to 1,611 stations in the previous version, NGA-West1 (2008). Both UCERF3 and NGA-West2 were funded by the CEA.

New insights from billions of dollars in insured losses from global events such as the 2010-11 Canterbury Earthquake Sequence in New Zealand among others have also been incorporated, along with an unprecedented resolution of data on soil-related conditions to better characterize local variability in ground motion and liquefaction.

Earthquake crack in the mountains

For California, the incorporation of both new earthquake science and improved computational methods enhances our ability to characterize the risk and increases confidence associated with the impacts of large events. A key insight from the new model is that we now understand that more of the risk in California is driven by the “tail.” New science surrounding the potential for earthquake activity in California suggests less frequent moderate-sized earthquakes, but a relative increase in the frequency of larger earthquakes which can rupture across a network of faults creating more correlated damage and loss.

While modeled average annual losses (AALs) may be lower for many policies or portfolios, the severity of losses at critical return periods remains consistent, and in some cases even greater.  The intuition here is a shift in the relationships between frequency and severity, increasing the variance. Earthquake is a tail-risk peril and now more than ever, risk management strategies and business practices need a holistic approach to pricing and capital, with a full consideration of the distribution throughout the tail.

Another generalized insight from the new model is a more balanced geographic distribution of risk across California. On an industry state-wide level, earthquake risk is now becoming more balanced between Southern and Northern California where it was once skewed more towards Southern California. These new regional patterns of risk, including new correlations within the sub-regions of California and across the state, will suggest new priorities for risk management and new opportunities to diversify risk and deploy capacity in more efficient ways. Of course, specific impacts will vary significantly depending on the particular composition of an individual book of business.

A third new insight is that within California, there is now more differentiation in location-to-location risk, allowing us to discern more variability in the risk at the individual locations or at the account-level. For example, the higher resolution models of surficial deposits increase local variability. Thus, relative to average changes in localized territories, there is now more dispersion in those territories. And, much finer-grained treatment of liquefaction allows us to see that many locations previously thought to be susceptible to liquefaction are not, and some are even riskier.

Better science and computational methods provide new measures of risk, but it’s more than just the numbers. It’s about the new insights, and the opportunities they create to build a more resilient book of business and create new solutions for the market.

How to Accelerate the Understanding of Disaster Risk

RMS is delighted in playing an integral role at the United Nations’ Global Platform for Disaster Risk Reduction in Cancun next week.  This is the first time that government stakeholders from all 193 member countries have come together on this subject since the Sendai Framework for Disaster Risk Reduction was adopted in March 2015.  Cancun looks forward to welcoming some 5,000 participants.

May 19 2017 - Daniel Sander - Cancun logo

Gearing Up for Action

At Sendai, the member states signed up to four priority areas for action and seven global targets.  The delivery date: 2030.

This global convening will act as a “show and tell” for member nations to outline the progress they have made over the last 26 months.  The purpose of the Cancun conference is for UN members to evidence how they are turning their disaster risk reduction (DRR) strategies into actions which substantially reduce disaster risk – and doing so at scale.

Fundamental to the successful implementation of the Sendai Framework is the first of the so-called Four Priorities, namely understanding disaster risk.  My RMS colleague, Robert Muir-Wood and I will be involved in several working sessions and ministerial roundtables at Cancun.  We will focus our contributions on this first priority.  After all, you cannot hope to effectively reduce your risks unless you comprehend them deeply – their frequency, the severity of outcomes and potential changes over time.

It is very encouraging that the United Nations Office for Disaster Risk Reduction (UNISDR) recognizes that organizations working in the private sector have a pivotal role in this endeavor.  In part, this is because the UN understands that the private sector is responsible for 70 to 85 percent of capital investment in most economies.  Ensuring those investments are made with a keen eye on resilience can make a material difference.

But there is another reason that the private sector has become a key stakeholder in the eyes of the UN.  Put simply, it is the recognition that there exists in the private sector a huge amount of expertise and experience in managing catastrophe risk.

A Measured Success

The slogan for the Cancun event speaks to this very point: “From Commitment to Action.”  There is a close link here with the second of the Four Priorities, namely strengthening governance structures around disaster risk reduction.

In this context, Robert and I will be reminding members of the old adage: if you can’t measure it, you can’t manage it – let alone be held accountable for it.  Further, we’ll be explaining why a decade of disaster data gives no meaningful perspective on the true risk of large and potentially destructive natural disasters, not to mention how that risk may be changing over time.

Take Haiti as an example. Through the nineteenth century, less than ten people were killed in earthquakes. Then, in a single afternoon in 2010, more than 200,000 died.  Looking only at a decade or two of actual losses prior to that fateful afternoon in 2010 would have provided scant indication of the true nature of the risk.

Photo: Wikipedia - Marco Dormino/ The United Nations Development Programme

Photo: Wikipedia – Marco Dormino/ The United Nations Development Programme

Equally there is no need to wait for the experience of a disaster to understand the inherent level of disaster risk.  We can take a page from the insurance industry’s book here.  Just as no insurer would base an underwriting decision on recent claims experience alone, so member nations should not allocate scarce DRR capital without due consideration of all the dimensions of risk: hazard, vulnerability, exposure, and capacity to respond.

Where data from the historical record is insufficient, the private sector uses probabilistic modeling techniques to capture the full range of possible outcomes, both in terms of their frequency and severity, in order to adequately model extreme, ‘tail risk’.  For the Framework to succeed – and, no less importantly, to prove that success – the standard of risk analytics in the public and private sector needs to rise to levels now taken for granted by the financial markets.

Adopting the Currency of Risk Analytics

Thankfully this high standard of risk analytics, widely accepted as a “currency” for risk within the financial markets, does not need to be created.  Member states do not need to start from square one.  The private sector has already invested decades in the science and technology required to analyze the potential impact of extreme events and their likelihood.  Over the years, billions, if not trillions of dollars of private sector investment in risk have relied on such analytics.

There are lots of examples of governments working closely with commercial providers of risk analytics.  I have personally had the privilege of working around the globe at all levels of government (from cities to sovereign states), using the capabilities my organization offers, to help officials – elected and staff – to own a view of the risks they face.  Factors such as independence, reputation, and the ability to talk the language of the markets are all valued, and help to accelerate conversations with providers of risk capital.

At Cancun, Robert and I will advocate for the wide use of independent risk reports, allowing members and large corporations to regularly disclose their current levels of disaster risk and how that corresponds to their resilience targets.  Such reports are a critical governance tool.  They are central to the objective measurement of progress in achieving Sendai’s stated risk reduction goals.

Aligning Incentives

There is no point in reinventing the wheel here.  Using widely-accepted, objective risk analytics will encourage the public and the private sector alike to strengthen disaster risk governance.  It will also enable governments and corporations to articulate their growing resilience to the financial markets in a language the markets understand.

Given the UN is appropriately focused on low and middle income countries, an interesting challenge emerges, however.  How can these resilience analytics be made available for these government and private sector stakeholders at an economically viable price point?

It is well known that prudent interventions in risk reduction can yield benefits worth multiples in reducing the costs of disasters. According to the details and context of any scheme, these benefit/cost multiples can be ten or more.

Then consider that over the last 15 years, the average amount of humanitarian aid in response to natural disasters in low and low-to-middle income countries was $2.2 billion annually.  I’ve never met a donor who doesn’t wish their money went further.  By redirecting a portion of this capital to understanding and reducing risk before an event hits, donors, aid agencies and NGOs can increase the ROI of their precious dollars.

If you measure it well, you will manage it well.  And if you align commercial incentives, you will inherit the metrics you need.

This will be our mantra for Cancun.  It will focus the member states on implementing effective risk-reducing strategies.  It will enable the UNISDR to monitor the successful implementation of the Sendai Framework.  And it will open the doors to data-driven, science-based investments which reduce risk and lessen losses substantially.

And the Winner Is….

It’s not as if a great evening at the Ritz-Carlton Coconut Grove in Miami with my peers and colleagues wasn’t special enough, but to collect the prize at the Reactions Latin America awards dinner for “Latin America Risk Modeler of the Year” was very special.  I would like to personally thank the panel of judges who represent some of the leading figures in the region’s insurance and reinsurance market for the award.

Victor Roldan

 

 

 

 

 

 

 

 

 

 

It is always an honor to be recognized like this, but more importantly, what did we do to deserve this? What is RMS doing across Latin America to help the industry understand, quantify, and manage risk associated with natural and man-made perils. And what are we doing to achieve our wider mission, to address a growing “protection gap” across the region, and to build more resilient communities through innovative and sustainable change.

Looking at natural catastrophe perils, earthquakes represent the largest source of natural catastrophe loss in Latin America, and accounted for over US$90 billion in economic losses from 1970 to 2015 according to Swiss Re figures. Mexico is certainly a focus for potential earthquake losses, along with Chile, Ecuador, Peru, and Colombia.  Swiss Re estimates that 88 percent of potential earthquake-induced losses are expected to go uninsured; the loss “gap” has grown from nearly 76 percent in 1980.

Mexico: Benefiting from Version 17 Investment

For Mexico, I am excited by the release of Version 17, as the RMS® Mexico Earthquake Model truly offers the latest scientific understanding of seismic hazard for the country. The model improves risk differentiation by incorporating new ground motion prediction equations for more accurate estimates of ground motion at specific locations, and offers an improved understanding of the geometry and event recurrence rates for the Mexico Subduction Zone.

Reflecting regional differences in construction design and practices in line with Mexico’s building and recently updated seismic codes, helps get model users closer to capturing different levels of vulnerability. For the updated Mexico City basin amplification model, vulnerability is focused on “micro-zones”, some at 100 meter resolution; zones first identified in the aftermath of the 1985 earthquake, as the seismic performance of similar buildings varied significantly, correlated with the soil properties of the building sites.

Exploring the South America Earthquake Model Suite

The RMS suite of South America Earthquake models covers Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Peru, and Venezuela; combined the models provide the most comprehensive coverage for managing earthquake risk in all seismically active countries in South America. Based on a single region-wide catalog that includes more than 134,000 stochastic events, the models capture the influence of local soil conditions on earthquake shaking and incorporate local design and construction practices into assessments of building vulnerability.

RMS has received approval for the RMS® Peru Earthquake Model and the RMS® Colombia Earthquake Model by the superintendents of insurance in each country for use by local insurance companies in submitting their regulatory filings.  This has broadened the choice of regulator-approved models for the firms operating in the region, as the regulators explore regulations similar to Solvency II in the European Union.

Effective Risk Differentiation for Hurricane

Floods and storms have been the most frequent perils in Latin America. For hurricane, Mexico, Central America, and the Caribbean all benefit from the extensive revisions and updates within the Version 17 RMS® North Atlantic Hurricane models, validated by over 20,000 wind and storm surge observations, over $300 billion in industry loss data, and more than $20 billion of location level claims and exposure data.  The models support effective risk differentiation and selection decisions down to the local level within and across regions. The hazard component incorporates high-resolution (up to 15 meters) and high-quality satellite data, reflecting the most up-to-date land use and land cover information.

And new opportunities arise, such as the RMS® Marine Cargo model managing cargo and specie risk from wind, storm surge and/or earthquake, covering 47 Caribbean and Latin American countries.  The model includes details on more than 2,000 combinations of transported products and how they are stored, packaged, and protected to provide a view of marine risk with unprecedented granularity.

Helping Support the Insurance Industry in Latin America

RMS wants to help insurers in the region to take full advantage of risk modeling developments and opportunities.  Last year, RMS introduced a risk maturity benchmarking framework for the Latin America market to help insurers quantify their strengths and weakness for catastrophe risk management. RMS provides an actionable set of recommendations and an implementation plan for improvement linked directly to an insurers’ strategic initiatives.

Solutions such as Exposure Manager, powered by the RMS(one)® platform, offer an easy-to-use interface to provide risk accumulations even for firms with limited risk analytics experience.  It helps clients minimize blind spots within their risk portfolios by enabling them to better manage their exposure concentrations using clearer, actionable views of real-time risk accumulations. RMS clients that do not yet have in-house analytics capabilities, receive support from our analytical services and solutions teams, which include fluent Spanish-speaking catastrophe modeling experts.

Building Resilience in the Region

RMS is a longstanding global platform partner of Build Change, supporting the retrofitting of low income housing, currently working in Haiti, Colombia, Ecuador, and Peru.  In collaboration with the Rockefeller Foundation, we partnered with several local governments in the region: in Mexico City, by evaluating the risk to key public facilities; in Medellin, Colombia, by assessing the cost-benefit of various retrofitting options; and in Santiago, Chile, by providing insight into the impacts of earthquake scenarios on the city.

We also developed a drought modeling application as part of a project with the German Government, the Natural Capital Finance Alliance and several leading financial institutions, including Banamex, Santander, and Banorte. The tool enables financial institutions to stress-test their lending portfolios against drought scenario events in several countries, including Mexico and Brazil.

Latin America offers huge growth opportunities for the insurance industry, and RMS is committed to help (re)insurers achieve their growth strategies. Please feel free to reach out to me.

EXPOSURE Magazine Snapshots: Water Security – Managing the Next Financial Shock

This is a taster of an article published by RMS in the second edition of EXPOSURE magazine.  Click here and download your full copy now.

18 Apr 2017 Exposure Drought image

 

EXPOSURE magazine reported on how a pilot project to stress test banks’ exposure to drought could hold the key to future economic resilience, as recognition grows that environmental stress testing is a crucial instrument to ensure a sustainable financial system.

In May 2016, the Natural Capital Finance Alliance (NCFA), which is made up of the Global Canopy Programme (GCP) and the United Nations Environment Programme Finance Initiative, teamed up with Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH Emerging Markets Dialogue on Finance (EMDF) and several leading financial institutions to launch a project to pilot scenario modeling.

Funded by the German Federal Ministry for Economic Cooperation and Development (BMZ), RMS was appointed to develop a first of-its-kind drought model. The aim is to help financial institutions and wider economies become more resilient to extreme droughts, as Yannick Motz, head of the emerging markets dialogue on finance, GIZ, explains.

“GIZ has been working with financial institutions and regulators from G20 economies to integrate environmental indicators into lending and investment decisions, product development and risk management.”

But Why Drought?

Drought is a significant potential source of shock to the global financial system. There is a common misconception that sustained lack of water is primarily a problem for agriculture and food production, but in Europe alone, an estimated 40 percent of total water extraction is used for industry and energy production, such as cooling in power plants, and 15 percent for public water supply.

Motz adds “Particularly in the past few years, we have experienced a growing awareness in the financial sector for climate-related risks.  The lack of practicable methodologies and tools that adequately quantify, price and assess such risks, however, still impedes financial institutions in fully addressing and integrating them into their decision-making processes.

“Striving to contribute to filling this gap, GIZ and NCFA initiated this pilot project with the objective to develop an open-source tool that allows banks to assess the potential impact of drought events on the performance of their corporate loan portfolio.”

Defining the Problem

Stephen Moss, director, capital markets at RMS, and RMS scientist Dr. Navin Peiris explain how drought affects the global economy and how a drought stress-test will help build resilience for financial institutions:

Water Availability Links Every Industry:  Stephen Moss believes practically every industry in the world has some reliance on water availability in some shape or form.  “With environmental impacts become more frequent and severe, there is a growing awareness that water as a key future resource is starting to become more acute.” adds Moss.

“So, the questions are, do we understand how a lack of water could impact specific industries and how that could then flow down the line to all the industrial activities that rely on the availability of water? And then how does that impact on the broader economy?”

Interconnected World:  Dr. Navin Peiris acknowledges that the highly-interconnected world we live in means the impact of drought on one industry sector or one geographic region can have a material impact on adjacent industries or regions, whether those adjacent are impacted by that phenomenon or not. This interconnectivity is at the heart of why a hazard such as drought could become a major systemic threat for the global financial system.

“You could have an event or drought occurring in the U.S. and any reduction in production of goods and services could impact global supply chains and draw in other regions due to the fact the world is so interconnected.” comments Peiris.

Encouraging Water Conservation Behaviors:  The ability to model how drought is likely to impact banks’ loan default rates will enable financial institutions to accurately measure and control the risk. By adjusting their own risk management practices there should be a positive knock-on effect that ripples down if banks are motivated to encourage better water conservation behaviors amongst their corporate borrowers, explains Moss.

“Similar to how an insurance company incorporates the risk of having to payout on a large natural event, a bank should also be incorporating that into their overall risk assessment of a corporate when providing a loan – and including that incremental element in the pricing.” he says. “And just as insureds are motivated to defend themselves against flood or to put sprinklers in the factories in return for a lower premium, if you could provide financial incentives to borrowers through lower loan costs, businesses would then be encouraged to improve their resilience to water shortage.”

Read the full article in EXPOSURE to find out more about the new drought stress-test.

 

Stephen Moss: Modeling Drought Reveals Surprising Range of Impacts
Stephen Moss, director, capital markets at RMS, said droughts affect far more than agriculture and can affect financial portfolios and supply chains. Moss spoke with A.M. BestTV at the Exceedance 2017 conference.

 

From Real-time Earthquake Forecasts to Operational Earthquake Forecasting – A New Opportunity for Earthquake Risk Management?

Jochen Wössner, lead modeler, RMS Model Development

Delphine Fitzenz, principal modeler, RMS Model Development

Earthquake forecasting is in the spotlight again as an unresolved challenge for earth scientists, with the world tragically reminded of this after the deadly impacts of recent earthquakes that hit Ecuador and Italy. Questions constantly arise.  For instance, when and where will the next strong shaking occur and what can we do to be better prepared for the sequence of earthquakes that would follow the main shock? What actions and procedures need to be in place to mitigate the societal and economic consequences of future earthquakes?

The United States Geological Survey (USGS) started a series of workshops on “Potential Uses of Operational Earthquake Forecasting” (OEF) to understand what type of earthquake forecasting would provide the best information for a range of stakeholders and use cases.  This included delivering information relevant for the public, official earthquake advisory councils, emergency management, post-earthquake building inspection, zoning and building codes, oil and gas regulation, the insurance industry, and capital markets. With the strong ties that RMS has with the USGS, we were invited to the still ongoing workshop series and contributed to the outline of potential products the USGS may provide in future.  These can act as the basis for new solutions for the market, as we outline below.

Operational Earthquake Forecasting: What Do Seismologists Propose?

The aim of Operational Earthquake Forecasting (OEF) is to disseminate authoritative information about time-dependent earthquake probabilities on short timescales ranging from hours to months. Considering the large uncertainty in the model forecasts, there is considerable debate in the earth scientist community whether this effort is appropriate at all – especially during an earthquake sequence when the pressure to disseminate information becomes intense.

Our current RMS models provide average annual earthquake probabilities for most regions around the world, although we know that the latter constantly fluctuate due to earthquake clustering on all timescales.  OEF applications can provide daily to multi-year forecasts based on existing clustering models that update earthquake probabilities on a regular schedule or whenever an event occurs.

How Much Can We Trust Short-Term Earthquake Forecasting?

A vast amount of research focused on providing short-term earthquake forecasts (for a month or less) has been triggered by the Collaboratory Study for Earthquake Predictability (CSEP), spearheaded by scientists of the Southern California Earthquake Center (SCEC). The challenge is that the forecasted probabilities are very small.  They may increase by factors of 1000, but remain very small even when they jump from one-in-a-million to one-in-a hundred thousand. Only in the case of an aftershock sequence would this climb to above a 10 percent chance for a short period, yet again with considerable uncertainty between different models. While this is a challenging task, the developments over the last 20 years have allowed for increased confidence as these models are already implemented in some countries, such as New Zealand and Italy.

How Can We Use OEF and What Do We Require?

RMS is dedicated to understanding new potential solutions that can fill market needs. OEF has the potential to generate new solutions if paired with reliable, authoritative, consistent, timely, and transparent feeds of information. This potential can translate into innovations in understanding and managing earthquake risk in the near future.

About Jochen Wössner:

Lead Modeler, RMS Model Development

Jochen Wössner works on earthquake source and deformation modeling with a focus on Asia earthquake models. He joined RMS in 2014 from ETH Zurich following the release of the European Seismic Hazard Model as part of the European Commission SHARE project which he led as project manager and senior scientist. Within the Collaboratory for the Study of Earthquake Predictability (CSEP), he has developed and contributed to real-time forecasting experiments, especially for Italy.

About Delphine Fitzenz:

Principal Modeler, RMS Model Development

Delphine Fitzenz works on earthquake source modeling for risk products, with a particular emphasis on spatio-temporal patterns of large earthquakes.  Delphine joined RMS in 2012 after over ten years in academia, and works to bring the risk and the earthquake science communities closer together through articles and by organizing special sessions at conferences.

These include the Annual Meeting of the Seismological Society of America (2015 and 2016), an invited talk at the Ninth International Workshop on Statistical Seismology in Potsdam, Germany in 2015, on “How Much Spatio-Temporal Clustering Should One Build Into a Risk Model?” and an invitation to “Workshop One: Potential Uses of Operational Earthquake Forecasting (OEF) System” in California.

Day Three at Exceedance 2017

It’s Wednesday, which meant another full day of sessions, presentations, The Lab, a networking event, and more, happening here in New Orleans.

22 Mar 2017 - The Lab EXCD small

Attendance has been exceptional at Exceedance, and some track sessions have been so popular that we are repeating a few of them. For those of you here in New Orleans, the sessions will repeat on Thursday morning, starting at 10 a.m. Be sure to check the Exceedance app for details.

The main theme of the morning’s general session was a demonstration of how RMS is working to help clients explore and manage new and emerging perils, as well as applying RMS model expertise to long-standing lines. Speakers included Mike Steel, Christos Mitas, Robert Reville, Steve Jewson, and Andrew Coburn.

Wednesday Highlights

A few of the highlights of the day’s sessions included:

  • Christos Mitas took us deep into what he described as the unique and exceptional world of cyber terror and cyber risk modeling, with insights that included the upcoming (April 2017) launch of the RMS Cyber Accumulation Management System CAMS v. 2.0.
  • Robert Reville from Praedicat explored product stewardship and product liability risk, explaining the causes of liability accumulation, how the risk of major technological innovation is not known, and how risk accumulation can go on for years.
  • Steve Jewson transported us to India and China, presenting new agricultural risk models – including drought models for four countries. Agricultural risk is one of the top concerns for our clients in Asia-Pacific and Latin America, offering the market exciting growth opportunities.
  • Andrew Coburn from RMS and Dr. Hjörtur Thráinsson from Munich Re combined to present the RMS strategy of a single data standard for all lines and classes of insured exposure, as well as opportunities to generate exposure analytics for more business lines, a single client, or a single location.

Our Second Theme – Resilience – Personified.

The afternoon general session focused on resilience, and the exceptional work happening here in New Orleans over the past several years. Paul Wilson began by acknowledging the accomplishments of Build Change, a partner organization to RMS that continues to build resilience in emerging nations.

He then walked the crowd through a brief history of New Orleans – a city that has been built, and rebuilt, on its experience with hurricanes – before introducing keynote speakers Tanya Harris-Glasow of the Make It Right Foundation, and Jeff Herbert, chief resilience officer for New Orleans. The success of the city following Hurricane Katrina stems from the efforts of innovators like them, and their stories of strength, perseverance, teamwork, and inspiration, truly personify the theme of resilience.

The session continued with Dr. Robert Muir-Wood’s discussion on risk modeling and resilience in Louisiana, and concluded with remarks from RMS President Mike Pritula, who spoke on a variety of topics including his commitment to concentrate on RMS clients, and the challenge of embracing the inevitable change that technology is bringing to the catastrophe modeling community.

The Lab is the Hot Spot in New Orleans!

Customer feedback about The Lab continues to be extremely positive – with a lot of great conversations, product demos, and training sessions focusing on the latest developments from Version 17 and Risk Modeler to help customers choose the best routes for adopting new solutions for 2017 and beyond.

Get Your Mojo Rising on at the EP Tonight!

Last night’s well-attended masquerade in The Lab is now a happy memory. And far as we can tell, everyone removed their masks in time for the first general session this morning.

22 Mar 2017 - Masked Ball Small

But if you’re here at Exceedance, our legendary “EP” is coming up tonight – offering three tastes of New Orleans in one unique location – Generations Hall, built in the 1820’s and originally a sugar refinery.

With three themes, Jazz Night Club, Mardi Gras, and Louisiana Cajun, be ready to put on your dancing shoes and show us your voodoo.

Thursday is our final day in New Orleans, so please check back tomorrow for highlights and a message from Hemant!

Day Two from Exceedance 2017

Tuesday dawned bright and sunny in New Orleans as Exceedance got underway.

More than 900 attendees joined Hemant and eight keynote speakers during the Exceedance General Session. Attendees learned how RMS continues to deliver on its client commitments with the launches of significant capabilities ranging from Version 17, including the new Version 17 RMS® North America Earthquake Model, Version 17 RMS® North Atlantic Hurricane Model, and Risk Modeler powered by RMS(one)®.

In addition to Hemant, Larry Orecklin from Microsoft took to the stage along with Emily Patterson, Mark Powell, Chris Folkman, Emily Grover-Kopek, Josh Ellingson, Ryan Ogaard and Eric Yau.

Tuesday Highlights

“Exceedance is a key part of our continuing dialogue with clients around their needs and priorities, discussing how we can better align to help meet their business goals.”

Hemant Shah, co-founder and CEO of RMS

Hemant demonstrated the superiority of the Version 17 North America Earthquake (NAEQ) Model through a personal anecdote. As you’d expect, Hemant ran the data on his own house through the model and found that his risk is down 27 percent on an expected loss with risk load factor. #lowerhemantspremium

Eric Yau announced that Risk Modeler, powered by RMS(one), will be ready for general availability in April, and described our continued commitment to RiskLink® as a standalone product, as well as being an integral part of the RMS(one) platform.

Josh Ellingson described how Risk Modeler will empower analysts to spend more time understanding the drivers of risk and applying their creativity to expand their book business by collapsing the manual processing of their modeling workflow.

Build Change

The Lab is Where It’s At!

With The Lab in full swing, attendees took advantage of the opportunity to engage directly with RMS experts – getting up-close insights and training on the RMS(one) platform, Version 17 North Atlantic Hurricane Model and North America Earthquake Model, and much more. It’s truly where the action is!

The Mini Theater

Not to be outdone by The Lab, the Mini Theater on Tuesday played host to three insightful and engaging presentations focused on building resilience in an ever-changing world. Topics included Enhancing Urban Resilience: Managing Risk to Critical Infrastructure; Stories from the Field: Nepal Impact Trek with Build Change, and Road to Coastal Habitats in Managing Natural Hazards.

Monday RMS Welcome Reception a Hit

Last night’s RMS Welcome Reception was a hit – and not just because of the live jazz music. The well attended two-hour welcome event included plenty of mingling, great discussions, and delicious bites.

Put on Your Mask and Come to the Party!

For those of you in attendance at Exceedance, join us in The Lab from 6:00 to 8:00 p.m. to celebrate our special New Orleans-themed masquerade (no costumes required, but masks will be provided). It will be a fun evening where you can engage with RMS leaders, scientists, and strategists as they reveal the latest RMS solutions.

Check back tomorrow for more highlights from Exceedance 2017!

 

Closing the Resilience Gap: A Tale of Two Countries, Nepal and Chile

Nepal house smallOn April 25, 2015, a magnitude 7.8 earthquake struck nearly 50 miles (80 km) northwest of Kathmandu, the capital of Nepal.  This resulted in more than 8,600 fatalities, the destruction of around half a million homes, and left 2.8 million people displaced.

Some two years on and rebuilding efforts have barely started, as US$4.1 billion of pledged international aid is reportedly stalled within Nepal’s National Reconstruction Authority.

As of February 2017, 14,000 homes have been rebuilt and some 30,000 homes are in construction – less than a tenth of the total number of homes destroyed.

Contrast this with the situation in Chile. Since a magnitude 9.4 earthquake in 1960, the country has focused on adequate seismic design requirements within its building code, with both government and the public willing to follow the principles of earthquake-resistant building design. And it’s paying off.

After a magnitude 8.8 quake in 2010, structures in areas that experienced strong shaking had less damage than would have been seen if building codes were weaker. Of 370,000 housing units affected by the earthquake, nearly half experienced only minor damage, and just 22 percent were destroyed.  Where commercial buildings were designed with the help of structural engineers, only five were destroyed, according to the U.S. Geological Survey.

This wide inequity in resilience between two countries facing major seismic hazard brings into sharp focus the urgent need for better quantification, mitigation, and post-event protection for all people, regardless of their location.

Bridging the Divide

Communities around the world can become more resilient both before an event strikes, through practices such as construction education and the implementation of building codes, or post-event by providing insurance and other appropriate risk transfer solutions for individuals and governments. By empowering these stakeholders, our industry can play a vital role in helping to ensure a safer world for all.

Social enterprises such as Build Change, who work on the ground in countries like Nepal, Columbia, and Haiti, are helping to bridge some of this ‘resilience gap’ by working with local governments to institute building codes and train their construction sectors in locally attainable and safe building practices. Over the past 10 years, Build Change has trained over 25,000 people in the basics of safe construction, created over 12,000 local jobs, and enabled 245,000 people to live and learn in safer homes and schools within some of the most catastrophe-prone regions of the planet.

Nepal builder smallThis week, during the annual RMS Impact Trek, both our employees and our clients representing major insurance and reinsurance firms are working together on the ground in Nepal with Build Change, exploring solutions to bring greater synergy and resilience capacity-building to the forefront of our market. We are proud to partner with Build Change by also providing grants to jumpstart and enhance its country programs, and allowing the organization to use our products for free in order to better quantify the risk landscape of the countries in which they operate.

All of us within the insurance industry have an opportunity to reshape the future for communities around the globe by allowing them to better measure and understand their risk, so that responsible mitigation efforts can take shape. We can create tools to help ensure that those who are struck by catastrophe can recover quickly and completely.

At RMS, we remain focused on contributing to this mission by strengthening resilience from the ground up, and continuing our work alongside impactful organizations like Build Change.

The Age of a Roof and The Price You Pay: New Analysis of Hurricane Risk in the U.S.

RMS has completed research on hurricane risk to single-family dwellings using an improved understanding of roof age, which can lead to more accurate loss projections using our models

Residential gable end roof failure in the Bahamas, observed following Hurricane Matthew

Residential gable end roof failure in the Bahamas, observed following Hurricane Matthew

Weak roofs mean losses during hurricanes. During reconnaissance trips to the southeast U.S. and the Bahamas following Hurricane Matthew last fall, RMS experts saw ample evidence of this simple fact.  Their on-the-ground survey highlighted everything from shingle and tile damage to complete roof failures.

Roof weakness significantly influences RMS’ view of structural vulnerability in our North Atlantic Hurricane models, which can factor in a roof’s age, covering, and shape into calculations of potential loss. However, this valuable property data is not captured by many insurers, and this could represent a missed business opportunity to improve underwriting – whether it be pricing or risk selection.

Extending the Data, Refining the Insights

RMS already has a dataset of hurricane claims from over one million single-family dwelling (SFD) homes in Florida and the northeast U.S., representing $240 billion in total insured value. However, this dataset lacks roof characteristics for a majority of the homes, so we augmented it with roof age information obtained from BuildFax, which holds detailed building characteristics for over 90 million properties in over 10,000 U.S. cities and counties. From this enhanced dataset we found:

  • About 70 percent of Florida homes (SFDs) had roofs aged 10 years or older at the time of the 2004-05 hurricanes
  • Roughly half of the Northeast homes (SFDs) had roofs aged 20 years or older at the time of Superstorm Sandy (2012)
  • Only 20% of all homes (SFDs) still had their original roofs, although this proportion was lower for coastal properties than for inland properties

So what was the relationship between roof age and losses? In the second stage of our research, our vulnerability modelers paired the exposure data with 182,000 hurricane claims, totaling $2.25 billion in paid losses, to look for patterns related to roof age.

graph claim severity 1

Normalized severity of Florida claims from the 2004-05 hurricanes, by roof age and selected wind speed bands, for all risk classes

Normalized severity of Northeast claims from Sandy, by roof age and selected wind speed bands, for all risk classes.

Normalized severity of Northeast claims from Sandy, by roof age and selected wind speed bands, for all risk classes

 

 

 

 

 

 

 

 

 

As expected, we found that homes with older roofs generally corresponded with more claims, and claims of greater severity. This was most evident at the low wind speeds experienced in the Northeast U.S. during Superstorm Sandy, as well as at higher wind speeds experienced in the Florida hurricanes. These graphs show that buildings in Florida with a roof older than 20 years are associated with claims that are between 50-100% more severe, compared with buildings having a roof less than five years old. A similar trend appears in the Northeast, but is muted because of the smaller dataset.

That’s the picture from historical data. But what about modeling potential future events? To answer that question we analyzed the enlarged Florida dataset, focusing on how roof age at a particular location compares to the industry average for that region.

patchwork map

Change in modeled AAL by Florida county when including roof age information from BuildFax

The change in modeled average annual loss (AAL) by county shows a patchwork of increased and decreased risk that corresponds to the average roof age of properties in each county.

So we can see that using roof age data leads to significant differences in modeled loss within regions.

That’s a valuable insight in itself. But we decided to drill down a little deeper.

 

 

 

From counties to ZIP codes to individual locations

Although the maximum change in AAL was less than 10% at the county level, changes of up to 20% were observed at the level of ZIP codes. These results show that improved understanding of predominant roof age could influence a company to change its regional underwriting strategy or refine its rating territories.

Going more granular still, within each county and ZIP code there is variation in the roof age of individual homes and this is critical to consider when writing new business. The scatter plot below shows the change in AAL at individual locations. Those homes with older roofs produce higher than average AAL and vice versa.

red blob map

Change in modeled AAL by location when including roof age information. “Location AAL” (x-axis) represents AAL without roof age

So when we go down to the level of individual locations the impact of roof age data leads to loss changes of up to 50%, demonstrating higher significance than at the regional level. For high hurricane risk locations in Florida with large baseline AALs, this change translates into substantial dollar amounts. That’s crucial to know, revealing key opportunities to improve underwriting practices. For instance, companies might choose to quote more competitively on price for properties with newer roofs.

Unsurprisingly, over time strengthened building codes and practices have led to stronger roofs that are more resilient to hurricane damage. But this research tells us much more – the sheer magnitude of modeled loss changes observed was significant, with clear implications for profitability, as explained by BuildFax CEO Holly Tachovsky:

“These results reveal key opportunities to improve underwriting practices, including pricing and risk selection. A focus on roof age can be the difference-maker for loss ratios in certain geographies. As a result, we see a growing level of sophistication among carriers that want to rate and select with a higher degree of accuracy.”

RMS remains committed to partnerships with industry experts like BuildFax to communicate the business benefits of emerging trends in the (re)insurance space.