Mid-January saw the publication of the annual World Economic Forum (WEF) “Global Risks Report” timed to set the agenda during this week’s WEF Annual Meeting in Davos.
With each new edition – and this year’s edition is the fifteenth, inevitably, one first turns to the opening page of the report, to discover the Top Five Global Risks for 2020, in terms of their “likelihood” and “impact”. What has been trending and what has slipped down the chart?
The World Economic Forum (WEF) has celebrated its fiftieth-year at its annual meeting in Davos. Increasingly the business/political nexus has become that articulated in WEF founder Klaus Schwab’s Davos Manifesto, that corporations “… must assume the role of a trustee of the material universe for future generations.”
In 2020, “Action on climate change” has now become the number one risk in terms of impact in the World Economic Forum’s Global Risk Report. The work at RMS on quantifying risk and exploring how risk is expected to shift under climate change has never been more important or timely.
In March 2018, RMS hosted the U.S. Geological Survey (USGS) workshop at our Newark headquarters in California to discuss the interim updates planned for the 2018 USGS National Seismic Hazard Map Project (NSHMP). Details can be found in my previous blog: Are You Ready for an Interim USGS NSHM Update?
The USGS informed the public and technical community about this interim update ahead of their regular six-year cycle of updates anticipated after 2020. The main purpose was to incorporate new ground motion modeling advances for Central and Eastern U.S. from Project 17, which has significant value for the national building code (details can be found here).
Towards the end of 2018, the USGS published the draft document and national hazard maps to receive scientific peer review and public feedback from the user community (Petersen et al. 2018). Since then, the USGS has been very busy incorporating the updates and finalizing the models. In December 2019, they published the official 2018 USGS NSHMP document in the Earthquake Spectra journal.
In our previous blog post, we reviewed how RMS has developed Risk Maturity Benchmarking, a tool to help clients understand their current processes and maturity and create a blueprint for improvement tied to their business strategy.
In 2017, RMS conducted a Risk Maturity Benchmarking (RMB) study for IRB Brasil Re (click here to read the full case study) to assist IRB on the implementation of their three-year transformation plan.
The IRB Transformation
Plan objectives were closely aligned to the company’s primary strategic
drivers. These included:
To grow IRB’s international presence as a “best in class” global reinsurer
To achieve greater capital efficiency across all business lines
To develop a market-advancing Enterprise Risk Management capability
To maintain a focus on innovation as a key differentiator
To achieve a competitive advantage by advancing modeling and analytical capabilities
Helping clients through the evolution of catastrophe modeling is a core mission for RMS Consulting. To assist in the process we have developed a tool called Risk Maturity Benchmarking, which we’ll introduce below, that helps our customers do this. Secondly, we will review an example where we have applied this framework with a client to create their own target operating model for catastrophe risk.
I don’t believe we would have achieved what we have if we had not first undertaken the RMB study
Luis Brito, head of catastrophe modeling, IRB Brasil Re
The industry is presented with both challenges and opportunities as the pace of change in the (re)insurance industry accelerates. Challenges include increased M&A activity, the entry of alternative capital and continued rate pressure, coupled with catastrophe losses from 2017 and 2018. These headwinds are contrasted by opportunities: an expanding protection gap which is not being filled quickly enough by the market, and technology – from data analytics to automation, frequently touted as the Holy Grail. All these factors have forced the industry to look at itself and reexamine how and where to compete in this brave new world.
This week marks the tenth anniversary of
the devastating earthquake in Haiti. The magnitude 7.0 event ruptured a thrust
fault associated with the Enriquillo-Plantain Garden fault system 25 kilometers
(16 miles) west of the capital city Port-au-Prince. This fault system runs
along the length of the Tiburon Peninsula and is no stranger to earthquakes,
with major events impacting Haiti in both 1751 and 1770. This large time gap since
the last major events meant that there was little to no societal memory or
preparedness for earthquakes in the region, making the 2010 event particularly
In the 2010 event, the strong ground shaking lasted 30 seconds and caused extensive collapse of masonry and concrete structures due to both poor design and construction practices, and poor construction material quality. An estimate for the resulting death toll is a staggering 150,000 people.
The scale of the damage and the number of people killed impacted all aspects of life for the remaining inhabitants of Port-au-Prince and the surrounding regions. Vital infrastructure including hospitals, communication systems and transportation facilities (e.g., the airport and port in Port-au-Prince) was severely damaged or destroyed, hampering disaster response. With 250,000 homes severely damaged, more than one million people needed to be housed and fed.
The sheer scale of the Australian bushfires is hard to comprehend, as what has already been a long bushfire season continues apace. Australia’s most-populous state, New South Wales (NSW) has been the worst-affected, with 12.1 million acres (4.9 million hectares) burnt over the current bushfire season. According to the New South Wales Rural Fire Service, damage has recently escalated with 672 homes destroyed since January 1, during a season which has seen 1,870 homes destroyed and 653 damaged.
There has also been reports of significant damage in the neighboring states, including Victoria to the south and Queensland to the north of NSW. Overall, across southeast Australia, 15.6 million acres (6.3 million hectares) have burned, and 25 people have been killed as of January 7. According to the Insurance Council of Australia (ICA), as of January 10, a total of 10,550 claims have been filed since November 8, amounting to around AU$939 million (US$645 million) in insured losses. The ICA notes that it expects more claims to be filed in the coming weeks.
Australian insurers are under the spotlight, but are holding up very well – insurer IAG has publicly stated it was “… on track to blow its perils allowance for the six months to December by AU$80 million” but had strong reinsurance in place. The article in Financial Review commented that there may be a modest effect on earnings for the industry overall, and premiums may have to rise.
The core idea behind catastrophe modeling is that the architecture of risk quantification is the same whatever the peril. While a hurricane is not an earthquake, building a hurricane catastrophe model has elements in common with an earthquake catastrophe model. Stochastic event occurrence, the hazard footprint, the damage mechanism, clustering, post-event loss amplification are all shared concepts.
While on the university campus, disciplines may retain their nineteenth century segregations, in catastrophe modeling we are “ecumenical” about what is the driver of loss: whether it is wind, hail, vibration, flood, cyber, a virus or a terrorist attack. The track of a hurricane, the track of a fault rupture: the contagion of influenza, the contagion of NotPetya malware: the topographic controls of flooding, the topographic controls of wildfire. Exploring the parallels can be illuminating.
Which is why it is interesting to discover historical figures, who like catastrophe modelers, have looked sideways across the catastrophe disciplines. One such figure is the Anglo-Greek Lafcadio Hearn (unless you are from Japan where he is known as Koizumi Yakumo.)
Safety from volcanic eruptions is heavily influenced by economic factors. Those who earn their livelihood from farming around a volcano may be reluctant to evacuate, and those who operate tourist excursions may be reluctant to suspend them. This may have been the case with White Island Tours which holds an exclusive license to land tourists on the privately-owned island in New Zealand’s Bay of Plenty, named White Island by Captain James Cook. Tourists averse to sea sickness have also been able to arrive on the island via helicopter through Volcanic Air.
With around 10,000 customers per year, paying up to several hundred New Zealand dollars (US$0.66 per NZ dollar) for a tour, White Island Tours has been a substantial business. But one whose financial viability would have required that as few trips as possible were cancelled because of the volcano risk.
After 22 years of business operation, the volcano erupted on December 9, 2019. There were 47 tourists on White Island; most were killed or seriously injured. 38 of the tourists were from the cruise liner Ovation of the Seas, operated by Royal Caribbean Cruises Ltd., which denies any responsibility for their excursions, which were advertised with the statement that White Island is one of the most active volcanoes in the world. The terms and conditions of cruise tickets require that any lawsuit be filed in Miami. The U.S. courts will thus decide what liability Royal Caribbean Cruises Ltd. had in vetting White Island Tours.
Over the past 15 years, we have witnessed some of the world’s largest possible recorded earthquakes that have had catastrophic impacts around the globe. But, looking back 30 years to 1989, we saw two smaller, but still significant earthquakes. The first was the M6.9 Loma Prieta event that hit the San Francisco Bay Area in October, an earthquake that is familiar to many due to its proximity to the city, and its level of destruction. However, less are aware of the other notable earthquake that year. December 28, 1989, is a memorable date for many Australians; as it marks the country’s most damaging earthquake in recorded history, and still remains one of Australia’s costliest natural catastrophes to date.
Despite its moderate magnitude, the M5.4 Newcastle earthquakecaused widespread ground shaking, with insured losses of just under $1 billion AUD (US$690 million) at the time of the event (ICA, 2012), a loss which if the earthquake was repeated, RMS estimates would cost over $5 billion AUD.