NIIT Technologies White Paper

Transcription

1 Catastrophe Exposure Management Surekha Sugandhi Insurance Practice - Solution Architect NIIT Technologies White Paper

2 CONTENTS Introduction 3 How it impacts insurers? 3 How Natural Catastrophe Risks are managed by insurers? 4 Catastrophe Loss; A look at the statistics 5 Catastrophic Risks: Choosing the right tool 6 How companies can be benefited from Exact 6

3 Introduction Global catastrophic risks are risks that seriously threaten human well-being on a global scale. An immensely diverse collection of events could constitute global catastrophes: potential factors range from volcanic eruptions to epidemic infections, nuclear accidents to worldwide tyrannies, out-of-control scientific experiments to climatic changes, and cosmic hazards to economic collapse. The tipping point: Katrina exposes a new trend We live in a world that is increasingly uncertain. For the first time in history humans dominate the planet and yet, paradoxically, the success of globalization has increased the risks we face. Nature has raised the stakes. In 2004 a record number of hurricanes and typhoons struck Florida and Japan. In 2006, Katrina and Rita delivered a one-two punch to New Orleans and Texas, tragically destroying thousands of lives and causing up to $400 billion in property losses. How it impacts insurers? Catastrophe exposures place special demands on insurer capitalization and require a distinct risk management approach. The interaction or covariance (versus independence) of the various risks, a company faces, is an important factor in determining the company s total capital requirements. Catastrophes represent significant financial hazards to an insurer, including the risk of insolvency, an immediate reduction in earnings and statutory surplus, the possibility of forced asset liquidation to meet cash needs, and the risk of a ratings downgrade. For property and casualty insurers, catastrophes are defined as infrequent events that cause severe loss, injury, or property damage to a large population of exposures. Whereas most property insurance claims are fairly predictable and independent, catastrophe events are infrequent and claims for a given event are correlated. The insurance process, if left unmonitored during lengthy catastrophe-free intervals, could produce increasing concentrations of catastrophe exposure. While people watch TV screens in shock and disbelief, scientists forecast a new global trend. Hurricanes that could impact the US are increasing in strength and frequency. Many believe that we are entering a new geological cycle and that the increased storm volatility is caused by the warming of the seas, part of an overall pattern of global warming. We may need to brace ourselves for several decades of more frequent and intense floods, hurricanes and typhoons. We need to prepare for an increasingly dangerous physical environment, and we need to do that fast. Challenges faced by insurance industry Catastrophe exposures broadly impact the insurance industry and present the following challenges: Identifying catastrophe risk appetite Measuring catastrophe exposure Pricing for catastrophe exposure Controlling catastrophe exposure Evaluating ability to pay catastrophe losses How Natural Catastrophe Risks are managed by insurers? Accumulation Control Commercial Earthquake - Earthquake coverage is only given as an extension of the standard policy. 3

4 - The number of policies is limited. - Control of accumulation is relatively easy. - Accumulation per Zone is monitored and controlled in day today underwriting. Wind /Flood - Wind cover is basically provided in all fire policies. - Flood cover is basically provided in all comprehensive fire policies. - The number of policies is enormous. - Daily monitoring and control of accumulation is rather difficult. - To grasp and control actual accumulation is essential, but to arrive at more realistic and meaningful assessment of their financial risk involved, they need to use some other tools. Current approach Probabilistic - The computer simulation of all the possible losses that could happen within a long period of time. - This type of model also makes it possible to understand the relationship between loss potential and occurrence frequency. Insurers are increasingly using these models. Some have in-house models. Some depend on professional companies. Fixing Retention Level Decision making factors Risk Profile Cost of Reinsurance Impact on PL Capital Strength Overall Decision - Management is fully involved in the decision process, because how much they can/should retain those largest risks is one of the most significant issues. Assessment of Maximum Possible Loss (MPL) Traditional approach - As if - To estimate MPL based on the past records. - Applying past losses to the insured values that exist now. - Good to know a single, simple, individual loss. - Some insurers have their own model for the simulation of their optimum retention. Catastrophe Loss; A look at the statistics Significant natural catastrophes worldwide 2011 Month Event Country Insured Overall losses losses US$m original values Fatalities March Earthquake, Tsunami Japan 2,10,000 35,000-40,000 15,840 August - November Floods Thailand 40,000 10, February Earthquake New Zealand 16,000 13, April Severe Storms, tornadoes 15,000 7, May Severe Storms, tornadoes 14,000 6, Jan-Dec Drought 8,000 2,400 August-September Hurricane, Canada 7,400 5, April-May Floods 4, April Severe Storms, tornadoes 3,500 2,000 9 January Floods Australia 2,800 1, Source: Munich Re 4

5 Insured catastrophe losses in the first half of 2012 came to $12bn, out of $26bn economic losses, according to the world s largest reinsurer Munich Re. This compares with a long-term, or 10-year, average (LTA) insured loss of $19.2bn and an economic loss of $75.6bn. Around the world, major earthquakes struck in Italy, the Philippines, Iran, and Afghanistan. The Philippines were also slammed by Typhoon Bopha, which claimed over 1,000 lives and left many more homeless. While global economic losses were close to average in 2012, insured losses last year were 36 percent higher than the 10 year average ($72 billion vs. $53 billion) because the two most costly events of the year occurred in the U.S., which has higher than average insurance penetration. The two major U.S. natural peril events, Hurricane Sandy and a year-long drought, accounted for two-thirds of all 2012 insurance losses globally and nearly half of all economic losses for the year, according to The Annual Global Climate and Catastrophe Report. Modenesi's Towers of Finale Emilia are destroyed following an earthquake on May 20, 2012 in Ferrara, Italy This Oct. 31, 2012 file aerial photo shows the damage to an amusement park left in the wake of Super storm Sandy, in Seaside Heights, N.J. (AP Photo/Mike Groll, File) 2012 saw many natural disasters strike across the globe, killing thousands and inflicting billions of dollars in property and infrastructural damage. From hurricanes and earthquakes to droughts, heat waves and wildfires, events were both widespread and severe. Despite a relatively quiet year for tornadoes, insured losses from thunderstorm events exceeded $14 billion, the second highest annual total on record. Severe drought cripples agriculture over large section of central United States. Dry conditions lead to the most damaging wildfires in Colorado history. 5

6 Catastrophic Risks: Choosing the right tool With advances in computer technology, new quantitative tools have been developed to help manage catastrophic risk. Geographic information systems have allowed companies to resurrect the pin maps, with significant additional abilities. But, well beyond merely looking at exposures, catastrophe simulation models have given us the ability to estimate potential losses in a way that truly reflects the long term frequency and severity distributions. The extent to which companies need to prepare effectively for catastrophe will depend on their resources, size, industry and the level of risk that they face. Heavily regulated industries, such as financial services, or those that operate in regions of high seismic activity or terrorist threat, will undoubtedly need to put in place more sophisticated plans. Such preparations need not be expensive or time-consuming even straightforward precautions, such as backing up all data to a remote site on a daily basis and putting in place policies for employees in the event of a catastrophe, could make the difference between survival and extinction. Models can have deterministic and/or probabilistic approaches. Deterministic modelling is the simulation of specific events, either historical or hypothetical, which are pertinent to the portfolio under study. This can be helpful for validating model results, or for providing an estimate for a certain event which concerns management. However, probabilistic modelling has the potential to provide much more information to management. In this method, the modeller runs a large library of hypothetical events that covers the range of potential events. From the results of all of these simulations, the modeller can estimate the probabilities of various levels of loss to the company (i.e., loss likelihood).this allows the company to manage its exposure portfolio and determine reinsurance decisions by comparing the potential losses with the company s appetite for risk. Catastrophe Loss; A look at the statistics It is impossible for companies to consider every eventuality that they could face in the future, and many of the incidents for which they do prepare may never happen. But despite this, companies would be foolish to ignore catastrophe risk management on the grounds that such incidents are either unforeseeable or too remote. Many of the precautions that companies need to put in place to deal with catastrophe are generic and would apply in the case of any major incident. For example, employees and assets must be protected, IT infrastructure and other operations must be restored, and reputation must be maintained using open, constant communication with customers, investors and the media. As such, companies should not necessarily focus on specific threats but rather on the general decision-making structures, roles and responsibilities, and priorities that they would need to set for any major incident. As the level and variety of threats that companies face increases, they are likely to face greater pressure from external sources, such as regulators, customers and shareholders, to put in place good catastrophe risk management. Executives who have ensured that their company has robust plans in place will not only be well prepared for a range of eventualities, but will also demonstrate to the broader stakeholder community that they take seriously their responsibility for protecting the organisation over the long term. How companies can be benefited from Exact Risk assessment software from NITL is used extensively by underwriters and captive insurers of location-based assets in the Lloyd's and Companies markets to effectively manage their risk exposure aggregations globally for all major classes of business. A key decision-making tool, Exact Advantage offers advanced aggregation capabilities enabling insurers to effectively monitor exposure to help analyse the levels of risk against a variety of live, historic and "what-if" natural and man-made disaster scenarios, such as hurricanes, earthquakes, terrorist attacks and floods. Exact Advantage aids the underwriting evaluation process, for planning and arranging outward reinsurance protections and for completion of regulatory requirements, i.e. Lloyd's Realistic Disaster Scenarios. Exact Advantage has the flexibility to support complex reporting based on geographic location, the peril and class of business, the policy limit and deductibles and is used for all major classes of business including Property & Casualty, Onshore Energy, Offshore Energy and Terrorism. The perfect storm for insurers - underwriters, regulators and investors - require greater understanding of risk with transparency of reporting but catastrophes worldwide, cat model challenges (lack of coverage, unreliable, black box), variable quality of risk data hinder accurate forecasting. 6

7 About NIIT Technologies NIIT Technologies is a leading IT solutions organization, servicing customers in North America, Europe, Asia and Australia. It offers services in Application Development and Maintenance, Enterprise Solutions including Managed Services and Business Process Outsourcing to organizations in the Financial Services, Travel & Transportation, Manufacturing/Distribution, and Government sectors. With employees over 8,000 professionals, NIIT Technologies follows global standards of software development processes. Over the years the Company has forged extremely rewarding relationships with global majors, a testimony to mutual commitment and its ability to retain marquee clients, drawing repeat business from them. NIIT Technologies has been able to scale its interactions with marquee clients in the BFSI sector, the Travel Transport & Logistics and Manufacturing & Distribution, into extremely meaningful, multi-year "collaborations. NIIT Technologies follows global standards of development, which include ISO 9001:2000 Certification, assessment at Level 5 for SEI-CMMi version 1.2 and ISO information security management certification. Its data center operations are assessed at the international ISO IT management standards. India NIIT Technologies Ltd. Corporate Heights (Tapasya) Plot No. 5, EFGH, Sector 126 Noida-Greater Noida Expressway Noida , U.P., India Ph: Fax: Americas NIIT Technologies Inc., 1050 Crown Pointe Parkway 5 th Floor, Atlanta, GA 30338, Ph: Toll Free: NIIT Fax: Europe NIIT Technologies Limited 2 nd Floor, 47 Mark Lane London - EC3R 7QQ, U.K. Ph: Fax: Singapore NIIT Technologies Pte. Limited 31 Kaki Bukit Road 3 #05-13 Techlink Singapore Ph: Fax: A leading IT solutions organization 21 locations and 16 countries 8000 professionals Level 5 of SEI-CMMi, ver1.2 ISO certified Level 5 of People CMM Framework Write to us at marketing@niit-tech.com D_37_170513