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Indications are growing that there is a shift underway in the risk landscape in California that may last several years, prompted by the ongoing severe drought.

It’s no secret that California is a region prone to drought. History shows repeated drought events, and there is emerging consensus that the current drought has no end in sight. In fact, there are indications that the drought could just be getting started.

The situation could be exacerbated by climate change, which is increasing the rates of water evaporation in western regions of the U.S.

We also learned recently that the groundwater levels in Colorado have been depleted by a “shocking” amount, which affects California as a significant amount of water used in the state’s agricultural industry comes from the Colorado basin.

California’s abundant agricultural industry has been fueled by its high sunshine input and the availability of water from the Colorado basin.The state produces nearly half of U.S.-grown fruits, nuts, and vegetables, according to statistics from the California Department of Food and Agriculture.

The sustainability of the agricultural industry is now in question given the emerging information about the security of the water supply, with long-term implications for food production—and therefore prices. While the threat is not to the California economy as farming accounts for little more than two percent of the state’s $2 trillion economy, implications will be to broader food prices and food security issues, as well as the security of those employed to work in this industry.

From a natural catastrophe perspective, we can expect the severity and frequency of wildfire outbreaks to increase significantly for several years to come if current indications prove true. In addition, we can expect that more areas will be impacted by wildfires.

The insurance industry needs to pay close attention to methods for estimating wildfire risk to ensure the risk landscape is accurately reflected over the coming years, just as it adapted in the late 2000s to a forward-looking, medium-term view of the probability of landfalling hurricanes accounting for multi-decadal cycles of increased and decreased hurricane activity in the Atlantic basin relative to the long-term average – and the subsequent consequences for the medium-term risk landscape.

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November 07, 2013

August 15, 2013
Uncertainty and Unknown Unknowns

At today’s inaugural ‘Catastrophe Risk Management & Modelling Australasia 2013’ in Sydney, the focus is on model uncertainty, unknown unknowns and best practice model usage in the context of these uncertainties. As I have observed many times, every catastrophe is the “perfect storm” and the one common factor of all catastrophes is they are all unique. Best practice is looking beyond the models and having a strong sense of “plausible impossibilities”. We must also make sure we do not forget lessons that are learned in the past, for example the importance of completeness and accuracy of data, and making sure that you understand the policy terms, for example sum insured or paying out for replacement costs. In the case of New Zealand, replacement must be to the latest building codes. One key question today has been whether the Christchurch earthquake could occur under a big Australian city. An earthquake of the same magnitude of the Lyttleton earthquake is certainly possible, but the soil types are quite different. As described in Robert Muir-Wood’s previous blog on ultra-liquefaction, one of the key characteristics of ultra-liquefiable soils is that they are glacially deposited; fortunately something that Australia, and even other cities in New Zealand such as Wellington do not have to the same extent as Christchurch. However, other potential surprises may occur, such as landslides in Wellington. The earthquakes of 2011 are clearly an opportunity to learn and improve our models, but we all need to embrace the fact that there will continue to be sources of surprise – ‘unknown unknowns’ are called that for a reason. Science and knowledge is always evolving. Best practice today will change tomorrow, just like in sports as diverse as rugby union or the Americas cup, where technology, training practices and even clothing was unimaginable 10 years ago. Our best understanding today will certainly change in the future. However this does not make models irrelevant. My favorite quote is a play on General Eisenhower’s statement that “In preparing for battle, I have always found that plans are useless but planning is indispensable.” I would say, “all models are wrong, but modeling is indispensable”. Modeling allows users to develop understanding of the models’ strengths and weaknesses, validate with whatever information is available, assess the methodologies and assumptions used, and decide what they are more comfortable with. In addition, users should consider stress tests and scenarios to further increase their intuition and knowledge of the risk potential. In 2011, I was part of a working group in London, which produced the very useful report “Industry good practice for catastrophe modeling: A guide to managing catastrophe models as part of an internal model under Solvency II“. Whilst written in Europe, the principles in this paper are applicable globally in all regions subject to all perils. As Australasia’s risks increase, together with regulatory interest in catastrophe modeling, this paper will continue to provide guidance and advice to all those involved in using catastrophe models to understand and manage their risk.…

Claire Souch
Claire Souch
SVP, Business Solutions, RMS

Claire leads the models & analytics solutions group at RMS, responsible for guiding the industry’s understanding and usage of catastrophe models, identifying market trends and future needs, and informing RMS’ model development and communication strategies. In this capacity, Claire and her global team interact frequently with clients, regulators, and rating agencies to educate and advise on topics such as model roadmap, uncertainty, and appropriate usage. She is a member of multiple industry task forces and advisory boards, and frequently speaks at industry events. Prior to joining RMS in 2000, Claire completed 3 years post-doctoral research. Claire holds a BSc in environmental biology and a PhD in surface water modeling from Cranfield University in the UK.

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