Hurricane Risk: A Reinsurer's Perspective

Kirsten Mitchell-Wallace, PhD

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Introduction Hurricane Sandy Deductibles and political risk Rates and Clustering An example of using hurricane footprints From model to real world Conclusions

Understanding hurricane risk: a reinsurers perspective

AAL by Peril (1970 - 2013)

Earthquake Wildfire Flood 4% 0% 5% Winterstorm 7%

Tornado Hail 46%

Hurricane 38%

Indexed PCS

Standard deviation HU>> TH

We have a choice of options

(bn USD)

AAL SD

Model A current outlook with w/o SS SS 21.92 18.50 44.02 39.06 Model B current outlook with w/o SS SS 16.86 15.21 36.63 34.43

Model A long term with SS 15.46 34.90 w/o SS 13.12 31.17

(bn USD)

Model B long term with SS 14.27 32.80 w/o SS 12.92 30.83 (bn USD)

AAL SD

AAL SD

Model C current outlook with SS 13.15 28.25

PCS

with SS 11.60 20.04

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But we need our own view of risk

Follows from Article 126, External models and data The use of a model or data obtained from a third party shall not be considered justification for exemption from any of the requirements for the internal model set out in articles 120 to 125 The view of the risk embedded in the cat model shall be understood and validated internally

The models are getting ever more complicated

can you really have your own view without building your own model? Model methodology/characteristics, flat behaviour, industry behaviour, portfolio behavior

NAHU Model Output Comparison

Implications of Model Change on IED Basis: OEP Curve Model A vs. Model B OEP curves for North-East
(B-A)/A

Above 20y RP: Model A < Model B Below 20y RP: Model A > Model B This effect has its origin in the landfall rates, not in the storm surge component

(A- B)/B

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Introduction Hurricane Sandy Deductibles and political risk Rates and Clustering An example of using hurricane footprints Conclusions

So what was so unusual about Sandy?

A. Surge B. Size

ing-sandys-surge

Courtesy: Richard Yang

Largest recorded!
Source: https://www2.ucar.edu/atmosnews/opinion/8585/dissecting-sandys-surge

And C. Societal Factors

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Linking data sources allows us to investigate losses

Location-policy level exposure data (EDM) always recieved as part of submission Detailed cedant claims data from cedants related to claim Linking policy and location information allows comparison of claims Overlay windspeed footprint Overlay surge footprint

One cedant much more coastally exposed

Mapping the locations of the claims using the exposure data gives insight
Damage ratio (Loss/Exposure) # claims/ # policies

Garrett County, Maryland - snow storm - power outages (80% of population affected)

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Overlay event footprints with losses

Example Sandy windfield footprint Hurricane Sandy: Flood Footprint zoom for New York Area

Modelled storm surge verified and modified with optical satellite (GeoEye). Produced by Sertit, sponsored and distributed by PERILS

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Cedant losses by cause of loss

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Can compare the Mean Damage Ratios (MDR) for cause of loss

As expected, fire has a much higher damage ratio than any of the other causes Excluding fire, this data does not show significant variation in damage ratio by cause of loss by windspeed band (although there is significant scatter) Others include: food spoilage, oil spill, sewage backup

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Keep in mind that there is a lot of scatter

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Damage ratio by construction type

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Damage ratio by age range shows patterns

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Damage ratio distribution differs for high and low windspeeds

Distribution of Claims in Damage Ratio Bands for different Windspeeds
40% 35% 30% 25% 50-60 20% 15% 10% 5% 0% 60-70 70-80 80-90

Proportion of Claims

90-100

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Damage Ratio

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Auto Physical Damage

APD data often not included in modelling submissions Underwriters always check directly with brokers Sandy a case in point

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Loss adjustment expenses vary by location and by cause of loss

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Some causes of loss are non-modelled

Of non-modelled, LAE is already added How representative is cedant? How representative is Sandy?

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1 2 3 4 6 7 8

Introduction Hurricane Sandy Deductibles and political risk Rates and Clustering An example of using hurricane footprints From model to real world Conclusions

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Hurricane deductibles and Sandy

Example from reanalysis of cedant data Post Sandy eight states (and DC) issued no hurricane deductible for Sandy decrees Conditions under which a hurricane deductible applied vary Hurricane deductibles typically 2% -5% of value AOP deductibles flat amount of usually $500 or $1000

Example: 300k home, damage ratio of 1% 5% hurricane deductible ($1500), $1000 AOP deductible Hurricane deductible: 3 k - 1.5 k = 1.5 k AoP deductible: 3k- 1k= 2k

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Across the EP curve for a cedant

Intuitvely, expect impact of deductibles to vary across curve depending on size of loss at particular frequencies Where would we expect political considerations to stop? e.g. a 10 bn market homeowners loss?

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for the industry

As expected, different behaviour by geographical region related to hazard

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Across the EP curve for the industry making a more realistic assumption
Impact on Gross Industry Losses (residential only) if hurricane deductibles were waived Analysis based on stochastic hurricane set of a vendor model Assumption: Only Cat 1 hurricanes will have hurricane deductibles waived Impact most pronounced in the North-East and Florida (for low return periods) At an industry loss level that starts to matter for reinsurers (arguably US$ 5bn for FL, US$ 10 bn elsewhwere ), the impact should not exceed 2% Very different from observation

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1 2 3 4 6 7 8

Introduction Hurricane Sandy Deductibles and political risk Rates and Clustering An example of using hurricane footprints From model to real world Conclusions

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US and FL hurricane landfall rates comparison

US
LT Model 1 Model 2 Model 3 1.67 1.67 1.73 warm SST / MTR 2.03 1.77 1.9 1.76* Model 1 Model 2 Model 3

FL
LT 0.61 0.61 0.65 warm SST / MTR 0.81 0.65 0.71

observed (HURDAT) 1.56

observed (HURDAT) 0.60

0.71*

*warm SST = 1995-2011

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Or in more detail

Comparison of LF Rates for all HU Categories

3 2.5 2

Rates

v9 MTR1 (C) Model 1.5 v11 MTR Model 2 (C)

Model 3 (C) v13 MTR Model 4 v11 LTR

1
0.5 0 Texas Gulf xTX Florida Georgia, Coastline North from Carolina Virginia to and South Maine Carolina All U.S.

Model 5 EQECAT

HURDAT - NOAA

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Can compare proportions too

Model

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Landfall history

US hurricane landfalls peaked in years 1916, 1985 and 2004. In the recent years since 2000 there is obvious clustering. Two years with unusually high number of landfalls and six years without any hurricane-strength landfalls have occured.

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Some definitions

The presence of clustering can be formally assessed by calculating the ratio of variance over mean in a given timeseries of count data: 2 = The ratio is called index of dispersion. = 0: constant random variable 0 < < 1: under-dispersed variable = 1: equi-dispersed variable > 1: over-dispersed (i.e. clustered) variable The classic averaging period to define climate characteristics is 30 years. The dispersion parameter of hurricane landfalls for the last 30 years is 1.7, which indicates over-dispersion. We investigate the magnitude and statistical significance of the dispersion parameter for various averaging periods.

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Clustering considering different time windows

The following plots show the dispersion parameter of the time-series of hurricane landfalls for all possible combinations of starting years and time-series lengths. Both plots are the same. Black color on the right hand side plot indicates significant over-dispersion at the 95% level of significance.

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Discussion

Significant over-dispersion is observed for averaging periods of 50 years or less, when the latest decade is included. Individual years with high activity have a strong influence on the result: The averaging periods that include the peak years 1916, 1985 and 2004 have markedly larger dispersion parameter than the period between 1937 and 1965, where no such peaks occurred.

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Relationship with NAO

Elsner et al (2000) suggest a link between hurricane track and NAO. An excited (relaxed) NAO is associated with higher (lower) latitude recurving (nonrecurving) storms. Periods of under-dispersion coincide with positive NAO conditions and vice-versa.

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Presence in cat models

Model vendors have investigated hurricane clustering. Variation of clustering properties in different parts of the North Atlantic has also been taken into account. Comparing the overall US landfall rates from two vendor models to a Poisson distribution (equidispersed assumption), there is no significant departure from equi-dispersion:

Clustering may still be present in Cat Model 1 in subsets of hurricane events in certain parts of the US. Clustering properties in the Cat Model 1 have been estimated from data from the 1950-2008 period. Possible changes in the dispersion properties with time have not been considered.
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1 2 3 4 6 7 8

Introduction Hurricane Sandy Deductibles and political risk Rates and Clustering An example of using hurricane footprints From model to real world Conclusions

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Model footprints: database

Aggregate model/Aggregate PCS

Complete set of footprints for HURDAT losses Not entirely easy to reconcile to HURDAT list, especially for older storms Other modelling vendors estimates Pielke and HURDAT loss estimates

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El Nio and hurricane (in)activity

El Nio has a strong impact on hurricane activity (Gray, 1984). During El Nio years, increased convection associated with strong rainfall is observed in the Easter Pacific. The Caribbean, being in the outflow of this convection, experiences stronger than usual Westerly upper level winds. Increased wind shear in turn inhibits the development of hurricanes. Conversely, more hurricane activity is observed during La Nia years. Pielke and Landsea (1999, hereafter PL99) linked El Nio directly to economic losses. Are El Nio conditions reflected in modeled losses?

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Reproducing publication using modelled footprints

Comparison between PL99 and losses estimated using a cat model PL99 refers to 1997 values. Model data have been adjusted accordingly. PL99 refers to economic losses. As a first approximation, model insured losses have been scaled by a factor of 2 to make them comparable to economic losses. Data limited to the 1925-1997 period (which is covered by PL99) PL99 and the model estimates have some similarities As expected, median losses increase as we move from El Nio to La Nia. Mean losses are maximum for neutral conditions. This reflects the fact that the standard deviation for neutral conditions is much larger. and some differences: median losses in the model are much lower than economic losses.

median
PL99 La Nia Neutral El Nio 3.3 0.9 0.2 model 0.7 0.2 0.02

mean
PL99 5.9 7.0 2.0 model 4.0 6.0 2.0

standard deviation
PL99 7.0 15.9 4.3 model 7.0 18.0 5.9
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We see the same

The discrimination between El Nio and La Nia conditions present in the economic losses is also seen in the modeled losses.

Table: Level of confidence of two-sampled t-tests testing the difference in the mean values of log-losses for different El Nino conditions

La Nia PL99 Neutral El Nio 94% >=99% model 86% 98%

Neutral PL99 model

81%

71%

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Loss frequency

La Nia/neutral years also have a higher loss frequency compared to El Nio years.

La Nia (22 years) PL99 > 1 billion > 5 billion > 10 billion 17 8 4 model 15 10 5

Neutral (29 years) PL99 14 8 6 model 16 9 8

El Nio (22 years) PL99 7 3 3 model 5 3 3

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Significance

Differences in PL99 losses for various El Nio conditions become weaker as we go to higher loss thresholds. Patterns in behaviour of model differences less clear Unlike PL99, there is no significant contrast between La Nia and El Nio in the model estimates.

Table: Level of confidence of two-sampled t-tests testing the difference in the mean values of log-losses for different El Nino conditions

La Nia PL99
> 1 billion Neutral > 5 billion > 10 billion > 1 billion 96% 48% 22% >99%

Neutral model
89% 97% 91% 37% 74% 73%

PL99

model

El Nio

> 5 billion
> 10 billion

90%
27%

63%
38%

74%
48%

90%
93%
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And for insured losses

Shifting the focus to model insured losses, a considerable difference is present between La Nia and El Nio conditions.

median La Nia Neutral El Nio 1.2 0.4 0.07

mean 8.3 14 4.9

standard deviation 16 43 13

Table 2: Level of confidence of two-sampled t-tests testing the difference in the mean values of log-losses for different El Nino conditions

La Nia Neutral 62%

Neutral

El Nio

95%

75%
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What have we learned?

La Nia years have more hurricane activity than El Nio years. This is reflected in the frequency and severity of losses. This result persists if different time periods are used This can also be seen using the PCS losses The effect is also seen is model footprints are used A clear decrease in loss frequency is seen for La Nia years also if we consider higher thresholds only.

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1 2 3 4 6 7 8

Introduction Hurricane Sandy Deductibles and political risk Rates and Clustering An example of using hurricane footprints From model to real world Conclusions

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From modelling to real world

Hard vs soft factors? ALAE Exposure growth Multi-model factors how and where? Cedant specificities e.g. not well-modelled Pool participations Comparison with loss history vailidity? Data for adjustments on specific cedants Underwriting judgement?
Min to Max Loading

Compare range of loadings with what we believe about models

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Client quality - which criteria should we measure?

Criterion 1 Criterion 7

Criterion 2

e.g. management strength, buying philosophy

Criterion 6

Business Plan Viability and Strategic Direction

Criterion 3

Criterion 5 Criterion 5

Criterion 4

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Comments on CQI

It is possible to score clients objectively Measuring leads to clarity and repositioning There is more to our decision making than modeling It matters what information the broker provides us with The strategic direction of our clients, and their business execution, are important decision drivers for SCOR Capacity is prioritised to core clients but there are always opportunistic/diversification plays Terms and Conditions are considered

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1 2 3 4 6 7 8

Introduction Hurricane Sandy Deductibles and political risk Rates and Clustering An example of using hurricane footprints From model to real world Conclusions

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Conclusions

Model evaluation is hard (through a glass, darkly) Model comparison and understanding is an essential component Other sources are critical to supplement our view, e.g. Claims HURDAT Science We need to differentiate between model generalities (research) and cedant specificities (underwriting) Working closely with underwriters is essential Finally, modelling our best view of risk must be integrated into our risk management and underwriting framework

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With special thanks to

Ronny Abplanalp Jacky Andrich Iakovos Barmpadimos, PhD Markus Gut, PhD Thomas Linford

SCOR Global P&C Guide to Hurricanes: http://www.scor.com/images/stories/pdf/ library/newsletter/pc_nl_hurricanes_en. PDF

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