MARINE CARGO & SPECIE RISK ACCUMULATION ON SHORE

Transcription

1 MARINE CARGO & SPECIE RISK ACCUMULATION ON SHORE April 2016 Copyright 2016 Risk Management Solutions, Inc. 1

2 AGENDA Background Lessons learned from recent Marine Catastrophe events Risk management practices Data capture Quantifying Cargo & Specie Cat risk Cargo-specific vulnerability Estimating exposure accumulations Concluding remarks 2

3 RMS BACKGROUND RMS is the world s leading provider of products and services for the quantification and management of catastrophe risk Work with most major insurance and reinsurance companies in US & Europe $2 trillion worth of insurance and capital markets transactions based on RMS Risk Models Trusted by regulators and rating agencies for over 25 years RMS catastrophe risk models used for rated capital market transactions Copyright Risk Management Solutions, Inc... 3

4 RECENT MARINE LOSSES: BAD LUCK OR THE NEW NORMAL? Four record setting catastrophes for Marine insurance in the past 5 years: 2011 Tohoku earthquake and tsunami $1B-$3B 2012 Costa Concordia: $2B loss 2012 Hurricane Sandy: $3B loss 2015 Tianjin explosions: $3B-$6B loss (and still growing?) The Marine Industry should expect more losses of this magnitude or greater! 4

5 EVOLUTION OF PORTS THE PAST 100 YEARS London 100 Years Ago Development of container ships has revolutionized the global shipping industry and dramatically improved quality of life However, containerization has also led to an increase in Catastrophe risk: Huge increase in shipping volume Abandoning river ports (lower Cat risk) in favor of sea ports (higher Cat risk) Longer-term, climate change will further increase this risk Shanghai Today 5

6 GROWTH IN SHIPPING CONTRIBUTES TO CARGO LOSSES International Seaborne Trade (MM tons)

7 AND CLIMATE CHANGE WILL JUST MAKE IT WORSE. Risky Business project Co-Chaired by New York Mayor Bloomberg looked at the risk from storms, heatwaves and flooding due to climate change RMS provided the detailed sector modelling of the impact of climate change on coastal communities. Climate change driven sea-level rise following from higher representative concentration pathways (RCP8.5) will increase expected losses from surge in New York as follows: Year Sea Level Rise* Property Surge AAL Increase cm 20% cm 79% cm 224% * Sea level rise relative to 2010: Robert Kopp et al 7

8 LESSONS LEARNED FROM RECENT CARGO CAT LOSSES 8

9 Loss $B HURRICANE SANDY (2012): A WAKE-UP CALL! 25 Sandy Insured Losses Sandy: Caused a record (at the time) $3B+ marine loss 20 $18.75B $21.75B Some effective risk management enabled the Port to return to action quickly 15 BUT Marine mitigation focused on Wind WHILE Marine losses were driven by Surge 10 Most Marine insurers also took Property loss: Clash! 5 Marine Cat risk must be managed and done so in conjunction with Property Cat 0 Category 1 9

10 HURRICANE SANDY LESSONS LEARNED Hurricane preparations focused on wind rather than surge 100yr Surge Surface Elevation Containers were unstacked to avoid tipping in wind Paintings in art galleries moved to basement to avoid wind (broken glass) damage Port used as long-term storage lot for autos Potential moral hazard of slow moving (and wellinsured) artwork Poor insurer knowledge of cargo in transit exposure made for slow identification and quantification of loss and delayed claims payments Storm surge risk at coastal locations can be identified & quantified, thus enhancing the ability to mitigate risk and manage future loss 10

11 TIANJIN EXPLOSIONS: LESSONS LEARNED Third largest port in the World Numerous accidental explosions (21 Tons TNT equivalent) and fire at hazardous chemicals storage facility in the port Total Port damages could reach $5B-$6B Large quantities of Cargo containers 15,000 new cars (up to 70,000 cars?) 176 deaths 800 injuries Loss estimate continues to grow Industry data capture practices must change to solve the problem of port accumulations Copyright 2015 Risk Management Solutions, Inc.

12 HOW BIG IS 21 TONS TNT EQUIVALENT? 10 Tons TNT 10 Tons TNT 1 Ton TNT : Khobar Towers Hezbollah: largest terrorist bomb on record 1996: Khobar Towers Hezbollah: largest terrorist bomb on record 1993: World Trade Center bomb Accidental explosion was more than 2x the largest terrorist bomb on record 12

13 TIANJIN GROWTH IN LOSS OVER TIME While it is common for loss estimates in major events to increase over time, Tianjin highlighted: Ever-growing cargo exposure in Ports Insurers data practices do NOT enable them to estimate how much Cargo exposure they have in a given port it was unacceptable for the industry to have failed to address its poor modelling of cargo exposures, having again been surprised by the cargo losses arising from the explosion in the Chinese port in August. Ed Noonan, CEO Validus Growth in Estimated Marine Loss Over Time $Billions 0 Credit Suisse Guy Carpenter IUMI Aug 17, 2015 Sept 4, 2015 Feb 3,

14 RISING TO THE CHALLENGE OF PORT EXPOSURE Insurer cargo exposure in Ports is a known unknown Average daily exposure in major global ports can be massive (Shanghai= $15B+) Current insurance industry data capture practices do not support the detailed quantification of Port exposure High Tech Pirates hacked a shipping company to figure out the perfect ship to plunder and located specific high value containers Business Insider: March 1, 2016 Detailed estimates of exposure by cargo type within ports can help raise the bar The insurance industry must improve data capture on Cargo in Transit in order to best manage major accumulations such as Ports 14

15 OTHER ACCUMULATIONS: AUTO STORAGE LOTS Auto storage lots (manufacturers, dealers, rental cars) represent aggregations of big ticket items Autos are at high risk of hail damage Cosmetic damage typically = total loss Covered lot vs. non-covered lot Key storage lot parameters Location Storage capacity Values of cars stored Covered/non covered Local hazard Exposure in Auto storage lots must be tracked particularly in areas of high risk Copyright 2015 Risk Management Solutions, Inc.

16 OTHER ACCUMULATIONS: FREE PORTS There are over 20 major Free Ports globally havens for the storage of art, valuables and collectibles Major benefits of Free Ports: o Security o Storage o Tax advantages Huge but unknown accumulations of exposure in Free Ports o Geneva Free Port: "It would be probably the best museum in the world if it was a museum". [( Jean-Rene Saillard of the British Fine Art Fund) Major Cargo & Specie writers should attempt to estimate exposure at Free Ports Copyright 2015 Risk Management Solutions, Inc.

17 OTHER SOURCES OF CARGO & SPECIE ACCUMULATION Fixed locations with relatively known values o Art Galleries o Museums o Wealthy households o Commercial businesses Importance of data capture o Address o Specie type & values o Level of protection o Building construction type Major Cargo & Specie writers should attempt to estimate exposure at all key locations Copyright 2015 Risk Management Solutions, Inc.

18 KOBE (1995) & TOHOKU (2011): OPERATIONAL RISK LESSONS LEARNED Kobe port was built on two artificial islands Significant liquefaction led to flooded cargo Amplified shaking destroyed piers & cranes 90% of Kobe berths were inoperable. Alternative ports couldn t handle Kobe traffic Shipping cost increased significantly Most roads, railroads and lifelines connecting the port suffered severe damage. Long recovery time of infrastructure vs. port Tohoku: many adjacent ports impacted Port operational risk planning needs to incorporate risk of adjacent Ports and connecting infrastructure 18

19 CHALLENGES OF MANAGING MARINE CARGO & SPECIE CAT RISK 19

20 CHALLENGES OF MARINE CARGO & SPECIE CAT MODELING Vulnerability: Current industry best practice is to model Cargo & Specie as Warehouse Contents in Cat model The actual vulnerability varies widely depending on the type of Cargo or Specie Underlying hazard can vary significantly depending on where you assume the Cargo & Specie is located Exposure: Cargo & Specie exposures change over time Exposure can move and the location is frequently unknown Values change over time Exposure faces a wide range of Cat perils as it moves around the World Data capture practices are sub-optimal Best practices for Marine Cat risk management dictate the understanding of Cargo Cat risk and its correlation with Property Cat risk 20

21 MARINE MODEL VALUE PROPOSITION Portfolio Management Holistic view of Cat risk including Marine (5%-15% of property Cat amount) Include Marine Cat in capital modeling (Lloyds RDS, Solvency II) Total Cat Risk Marine Cat Improve decisions around reinsurance needs Improve exposure management Cargo Underwriting Property & Human Cat Improve pricing of Cat component of Cargo Pricing models specific to cargo type with improve competitiveness and risk selection Enable companies to increase premiums Better risk selection and pricing, leads to increased premiums and more profitable Cargo book 21

22 MARINE CARGO & SPECIE VULNERABILITY 22

23 VULNERABILITY: CHALLENGES WITH CURRENT MARKET PRACTICE Wind Vulnerability 4 red curves = North Atlantic hurricane model, warehouse contents (low, medium, high, very high damageability). Grey Curves = Cargo model, average damageability. Current industry best practice: model all cargo types as warehouse contents Challenges with this approach In reality, vulnerability will vary significantly based on: Cargo type Packing practices Storage facility Location Modeling of specific cargo & Specie types will provide a more accurate and typically lower risk 23

24 Cargo & Specie Specialized Vulnerability Curves HOW DAMAGEABLE IS IT? Differentiating vulnerability by cargo type: o 18 Cargo & Specie types (auto, electronics, break bulk, consumables, general specie ) o 12 Storage methods (container, warehouse, tank, outside ) o Factoring in potential salvage value o 10 Damage mechanisms modeled (wind, water, volume loss.) o Consideration of damage reduction measures (movability, storage in safe.) Key perils to monitor o o o o o Wind and surge Earthquake Hail Flood Terrorism Model losses at key locations and analyze correlation with property losses Copyright Risk Management Solutions, Inc... 24

25 Marine Product Categories / Occupancy Copyright Risk Management Solutions, Inc... OCC_SCHEME OCC_TYPE Occupancy Type 0 Unknown 1 Automobiles 2 Break Bulk 3 Dry Bulk 4 Liquid Bulk 5 Consumables 6 Temperature Controlled 7 Electronics 8 Explosives RMSMARINE 9 General Cargo 10 Heavy Industry 11 Petroleum Products 12 Pharmaceuticals 13 Project Cargo 14 Livestock 15 General Specie 16 Fine Art & Collectibles 17 Cash In Transit 18 Jewelers Block 25

26 Storage Configuration (Construction Class) BLDG_SCHEME BLDG_CLASS Construction Class 0 Unknown 1 Special Design Facility 2 Silo 3 Liquid Tank 4 Gas Tank 5 Inside Warehouse at Port RMSCGSPEC 6 Containerized - Inside Warehouse 7 Containerized - Stacked Outside 8 Open Lot or Stockpiled Outside 9 At Destination - Warehouse 10 At Destination - Retail 11 Museum or Institution 12 Retail or Private Building Copyright Risk Management Solutions, Inc... 26

27 Contents Grade Damageability 1 High Damageability 2 Moderate Damageability 3 Average Damageability 4 Low Damageability Incorporating Underwriter Specific Knowledge Specificity of product (e.g. fishmeal vs. canned food, both consumables ) Packaging better or worse than average Loss mitigation measures of warehouse, storage facility, or port terminal better or worse than average. Copyright Risk Management Solutions, Inc... 27

28 DIFFERENTIATING RISK BY CARGO CATEGORY Robust Risk Differentiation 18 cargo types Determines susceptibility to damage Movement Rain water Flooding Contamination Power loss Port Delays 28

29 DETAILED IDENTIFICATION OF SPECIE TYPE & SITUATION Specie Types (Occupancy) Specie Storage Combinations (Construction) Specie Secondary Modifiers Marine Modifier Salvage Potential Cargo & Specie Packaging Cargo & Specie Protection Specie Storage Sprinkler Type Option Unknown Lowest Low Average High Very High Unknown Deficient Standard Superior Unknown None Slightly Protected Well Protected Unknown Inside Vault Outside Vault Window Unknown Wet Dry 29

30 MARINE CARGO & SPECIE EXPOSURE AGGREGATIONS 30

31 EXPOSURE: CHALLENGES WITH MARKET PRACTICES Nil Hazard Varies Widely Within a Port* 3% 45% 35% Current industry Best Practice: model estimated exposure at the centroid of the port Challenges with this approach Where is the centroid of a Port? Risk can vary drastically within a large Port The type and value of cargo stored varies by terminal * Amounts shown represent 250 yr modeled Wind+Surge losses for Contents Modeling of specific cargo & Specie locations will provide a more accurate measure of risk 31

32 PORT-SPECIFIC INDUSTRY EXPOSURE DATABASES (IEDS) Enabling a Market Share Approach Throughput by cargo type o Volume o Import/export o Dwell time by cargo type o Local cargo handling practices o Seasonality Storage facilities o Location (lat/lon, elevation) o Facility type (warehouse, tank, silo.) o Number of floors Copyright Risk Management Solutions, Inc... 32

33 TERMINALS Terminal Type Name APM Terminal Brooklyn Port Authority Marine Terminal Container Maher Terminal Port Newark Container Terminal New York Container Terminal Red Hook Container Terminal General Cargo/Break Bulk Automobile Petroleum Products Global Marine Terminal North East Auto Terminal (NEAT) The Elizabeth Port Authority Marine Terminal Port Newark Port Jersey-Port Authority Marine Terminal South Brooklyn Marine Terminal International Matex Tank Terminal (IMTT) 33

34 OPEN LOT STORAGE (PORT ELIZABETH) 34

35 VALUE PROPORTION DISTRIBUTION New York/New Jersey Distribution of Value (in Million USD) Construction Class Known through research Partially estimated Estimated O c c u p a n c y T y p e Value in USD % Special Design Facility Silo Tanks Inside Warehouse Containerized - Inside Warehouse Containerized - Stacked Outside Open Lot or Stockpiled Outside Unknown 5% - 5% 5% 20% 10% 20% 40% Automobiles 8% % - 5% 90% Break Bulk 14% % % Dry Bulk 3% - 10% - 45% % Liquid Bulk Consumables 13% % 45% 45% - Temperature Controlled 1% % 30% - - Electronics 3% % 20% 10% - Explosives General Cargo 18% % 33% 33% - Heavy Industry 10% % - 34% 33% Petroleum Products 23% % - 5% 10% - Pharmaceuticals 2% % 50% - Project Cargo 1% % General Specie 1% %

36 Property Model is Too coarse for Underwriting Marine Profitably Current Practice Code lat/lon of Port Centroid in Property model Assume contents coverage Impacts vary significantly Vulnerability: Product type & storage configuration IED: Spatial distribution of exposure 36

37 IMPROVED UNDERSTANDING OF CARGO RISK IN PORTS Estimate of cargo values by type and location enables quantification and market share calculation of risk Models enable understanding of portspecific risk Breadth and severity of natural perils facing a Port Wind vs. Surge Seasonal factors (hurricane season) Liquefaction risk To improve on this market-share approach the Cargo industry will need to develop real-time cargo tracking capabilities 37

38 CONCLUDING REMARKS The Marine industry will continue to incur losses of magnitude equal to and greater than recent events Lessons learned from these events coupled with science-based models can reduce this risk Improved understanding of risk Source and timing of risk Differentiate areas at risk of wind, surge & EQ Magnitude of risk Catastrophe preparation Pricing Cat portion of Cargo risk The industry must improve data capture, particularly for Cargo in Transit to best understand and manage the risk Download RMS Cargo study on 38

39 THANK YOU! Peter Ulrich +1 (510) Paul Burgess RMS Singapore