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Catastrophe Models: Big Data, Climate, and Insurance

Dag Lohmann KatRisk LLC, Berkeley, CA, U A London, UK

http:!!"""#katrisk#com

Dec $%&', BARU( Meetup

About us and this talk

We are a company (started last year August in US and UK) working on global catastrophe models A longer version of this talk with more details can be found on http: www!katrisk!com "#ample code in $ %&ow to build a catastrophe model' is also on the website (f you are interested in working together with us send me an email: )ag!*ohmann+Kat$isk!com

Agenda

What are catastrophe models "#plain basic risk language Why is this %,ig )ata'.lobal climate data study with $ /odeling catastrophes with $ 0losing thoughts 1uestions

2atural )isasters "#amples

What is catastrophe modeling

0atastrophe: an event causing great and often sudden damage or suffering Why model catastrophes

,ecause catastrophes are rare events that cause great harm ,uild resilient societies where risk adverse behavior is rewarded Actuarial pricing is based on loss e#perience 3 which is too short

4it fre5uency and severity distribution to past claims 0alculate loss distribution Use for pricing6 portfolio management6 reinsurance
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&istory of 0atastrophe /odels

AIR (1987) and RMS (1988) founded

Build first EQ and hurricane models #1$B insured losses 11 insol%encies #12B insured losses

1992 !urricane Andre"


199& 'orthrid(e Earth)ua*e

199$ +irst cat ,onds- Ratin( A(encies re)uire cat loss information 2..1/2..2 012 and first terrorism model 2..3 !urricane 4atrina

#&.B insured losses . insol%encies


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$isk 7ocabulary

Hazard: severity6 rate6 return period Vulnerability: inventory6 construction classes Exposure: line of business6 8(7 and 8S( Statistics and analytics: fre5uency6 9)4 and 0)46 e#ceedance probability6 :"96 A"96 ,ayesian statistics6 loss cost6 9/*6 "9 uncertainty Frequently used distributions: 9oisson6 ,eta6 2egative ,inomial6 .amma
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(nsurance 2eeds

8wo basic business processes:


Underwriting 9ortfolio /anagement

Underwriting needs information about local risk at the location level (if that is available 3 otherwise needs good idea about area) 9ortfolio /anagement needs information about correlation between locations and aggregation of risks

Structure of a 0atastrophe /odel

0atastrophe models provide


0atalog of synthetic events with occurrence probability )amages and insured losses to portfolio Actuarial statistics (AA*6 "9;curves6 !!!) Where do historic events fall on the "9 curve

Stochastic Driver (SS8) Stochastic Event (9recipitation)

Hazard (4lood &eight)

Exposure & Vulnerability (damages caused by ha<ard)

Financial (insurance payment for policy )

4lood /odel "#ample


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(nformation in a catastrophe model

0at /odels e#tend a company=s loss e#perience with a synthetic event set

4i#ed set of unobserved but realistic events 0alculate ha<ard intensity for all e#posed locations 0alculate resulting damage (9>0) Apply financial structures to model output :utput typically is an "vent *oss 8able

4rom which we can then derive all analytics6 e!g! loss by postcode6 loss by line of business (*:,)6 "96 etc!

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Why is this %,ig )ata'

(nput

All suitable meteorological data (last ?@A years) )ata analysis uses many statistical and /* techni5ues (90A ":4 shown later) ?AAk and more ensembles of atmospheric and hydraulic models Use statistical methods machine learning on 8, of data ?AA millions of locations in insurance portfolio that we want to have probabilistic information for )ata si<e e#ample: ?AAk years B ?AAm locs B ? @A occurrence probability C DAAb records to apply financial terms and conditions to
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9rocessing6 model building6 and model output


$isk modeling

&ow are we doing it 3 why $

(nput

collect all meteorological data (about EA 8, needed) Analysis with $ Use supercomputers (8itan in our case) with .9Us Analysis with $ $: calculation6 (: $ Shiny: web framework *eaflet and /apServer 3 web mapping 7arious $ packages R is deeply embedded in many insurance companies
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0omputation and 9rocessing


$isk /odeling 4ramework


A 5uick climate data study with $

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4loods 3 "#pensive "vents


EVEN

F"A$ DA??6 Aug ; 2ov DAAD6 Aug DAAK6 Lun DAAK6 Lul DA??6 Lan DAA@6 Aug

:verall *osses (million G6orig! value) HA6AAA ?J6@AA H6AAA H6AAA D6MAA E6EAA

(nsured *osses (million G) ?A6AAA E6HAA E6AAA E6AAA ?6MK@ ?6KJA ?6DKA ?6?AA ?6?AA ?6AKA

8hailand "lbe ()"6A860I6 &6 0&6 SK) UK UK Australia A86 4$6 )"6 &6 S*6 0& USA UK 4$6 (86 "S 4$

?NNE6 Lun 3 D?6 AAA Aug DAAA6 :ct ; ?6KAA 2ov DA??6 2ov DA?A6 Lun D6?AA ?6@AA

Are weather and climate linked

.lobal climate variables are correlated ,ut we have to look for the spatial patterns on the relevant time scales Stochastic model based on SS8 and precipitation anomaly correlations

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.lobal Sea Surface 8emperature

Split each variable into three components

/ean O 8rend O Seasonal O Anomalies


Average SS8 has increased about A!HK in the last JA years Average seasonal variation is about A!HK Anomalies are %e#tremes' SS8 trend by region

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.lobal Sea Surface 8emperature

We can apply the same method of splitting up a temporal signal for each grid cell

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$ 0ode
sst!file P; open!ncdf(sst!filename) sst P; get!var!ncdf(sst!file6QsstQ) sst!d P; apply(sst6?6detrend) sst!m!anom R compute anomaly (deviation) pca!sst P; prcomp(t(sst!m!anom)6 centerC4A*S"6scoresC86ret#C86 scaleCeof!scale) 0ompare with climate indices enso P; matri#(scan(=enso!t#t=)6ncolC@6byrowC8) enso!inde# P; ensoS6@T sd(ensoS6@T)
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Analy<ing the 9atterns of the Anomalies

We can then analy<e the temporal anomalies and e#press them in patterns that reduce data si<e (":4 90 analysis)

We essentially separate space and time with this method! "ach spatial pattern (the ":4) has an associated temporal component (the principal component 3 see ne#t page)

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What are these 9rincipal 0omponents

8hey are teleconnection indices


90? is close to the "2S: inde# 90D is close to the Atlantic /ultidecadal :scillation
"2S: A/:

/ultiplied the 90D time series with ;?


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(s precipitation correlated to SS8

9rocedure: take the SS8 based principal component U? time series (V"2S:) and calculate the anomaly correlation coefficient for each grid cell
We averaged the precipitation anomalies over three month (which increases correlation)! Shown here is the ma#imum cross; correlation! 8ime of lag is shown below!

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7A$/AW Stochastic /odeling (90 ?)


&istorical O ?AAA years simulated 55 plot

Autocorrelation historical

Autocorrelation simulated

004 90? with 90 ? historical

004 90? with 90 ? simulated

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.lobal )rought (nde# /odel

Use stochastic SS8 boundary conditions

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8he $isk /arketplace

8hree big vendors dominate the market with closed; source software and data formats

2o generally accepted open standard for input and output *imited documentation )ifficult for clients to incorporate their own e#perience and research &igh cost of ownership 7ery high entry hurdle A0:$) data standards :AS(S *oss /odelling 4ramework (*ondon)

(nitiatives to change this:


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*oss /odeling 4ramework continued

Supplied by user ("#posure):


*ocation 7alue *ine of ,usiness ($es6 0om6 (nd6 X) ,uilding characteristics (basement6 masonary6 D stories6 ?NDM) 9olicy terms (deductible6 limit) 0ontracts

7ulnerability
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What do we use

$: calculation6 (: $: link to 4ortran (no Yoke!!!) and 0 0U)A for fast simulations $ Shiny: web framework *eaflet and /apServer 3 web mapping 7arious $ packages

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A 5uick movie

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$ O LS O &8/* 0ode

,uild this before *eaflet package became available with LS6 html
PZ;; Start span J /ap ;;[ Pdiv idCQmapQ styleCQwidth: ?AA\] height: JAAp#Q[P div[ Pscript srcCQhttp: leaflet!cloudmade!com dist leaflet!YsQ[P script[ Pscript srcCQYson S"Asia/i#!smallJ!YsonQ typeCQte#t YavascriptQ[P script[ Pscript typeCQte#t YavascriptQ[ var 5st C new *!tile*ayer(=http: otile?!m5cdn!com tiles ?!A!A sat ^<_ ^#_ ^y_!png=6 ^ attribution:=8iles 0ourtesy of Pa hrefCQhttp: www!map5uest!com Q targetCQ`blankQ[/ap1uestP a[= _)] var floodmap C new *!8ile*ayer!W/S(Qhttp: localhost cgi;bin mapservQ6 ^ map: Q var www /apServer`Apps asia!mapQ6 layers: =Asia`flood=6 format: =image png=6 transparent: =8$U"=6 _)] var map C new *!/ap(QmapQ6 ^ center: new *!*at*ng(D@6??A)6 <oom: @6 minIoom: D6 ma#Ioom: ??6 layers: S5st6floodmapT6 _)] P script[ P div[ PZ;; "nd Span J /ap ;;[

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$ 0ode from our website

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0ode in progress

1ueries for aggregation by *:,6 area6 construction type6 portfolio6 account6 etc! $eactive code for altering event set (severity6 fre5uency6 correlation) $eactive code for sensitivity studies ,etter mapping (*eaflet package)6 heatmaps6 !! $eporting

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Summary O 1uestions

9lease contact me if you have 5uestions: )ag!*ohmann+Kat$isk!com 9lease look at the e#tended presentation and the $ code on our website 0ome by our office (,erkeley)

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