OECD 2 nd International Cat Risks Conference Bangkok, Sept 25 th 2009

1. 'How installing and running a high quality hazard instrumentation network can facilitate the creation of parametric triggers' Robert Muir-Wood OECD 2nd International Cat Risks Conference Bangkok, Sept 25th 2009

2. Agenda 1st and 2nd generation parametric risk transfer structures Instrumentation requirements Role of governments/multilateral agencies to enable parametric risk transfer

3. Investor/Issuer Mismatch - Developed World Investors Issuers • Prefer indemnity • Dislike basis risk • Settling for industry loss or modeled loss • Prefer parametric • Dislike indemnity • Bias for simplicity “When they were designing the Cat bond market, they forgot to invite the investors”

4. Investor/Issuer Mismatch - Developing World Investors Issuers • No insurance institutions to process claims • No reliable historic claims • Proportional recovery better than nothing • Only parametric is tenable For the developing world – it has to be parametric

5. First & Second Generation Parametric • 1st generation parametric is based on the parameters of the event • ie. earthquake magnitude and location (in a geographic ‘box’) • Hurricane intensity and track (and distance from the site) • 2nd generation parametric is based on measurements of the hazard at multiple locations • Eg. peak ground acceleration measurements or peak gust windspeed recordings • Weighted by the exposure values and vulnerability in the vicinity of each recorder, a formula is developed and tuned to create an index that closely matches loss • Parametric structures require pre-existing Cat model to design correlation with expected loss and risk analysis for the Bond • Higher basis risk (mismatch with actual losses) likely for 1st generation than second generation structures

6. Caribbean Catastrophe Risk Insurance Facility – 1st Generation parametric trigger • Launched Feb 2007 to provide participating governments with immediate liquidity if hit by a hurricane or earthquake. • For hurricane - trigger based on ‘calculated’ windspeeds at key exposure concentrations • Derived using predefined Rmax of a hurricane • However real radius can vary by factor of 10 • For earthquake based on magnitude in a box not ground motion on an island • For a small island – there is the potential for no payout when significant loss as well as payout when there is no loss • 2nd generation parametric not used in the Caribbean (in 2007) because of lack of suitable pre-existing windspeed and ground motion instrumentation networks.  

7. Caribbean Insurance Pool Not Affected by Hurricane Dean INSURANCE JOURNAL By David McFaddenAugust 24, 2007 Hurricane Dean will not trigger an insurance pool set up this year by Caribbean countries and the World Bank that provides emergency cash to islands in case of natural disaster, officials said this week. The hurricane, which killed at least 20 people across the region and did extensive damage to bananas and other crops, failed to surpass wind speeds and other thresholds to prompt payments from the disaster pool established in February, according to fund supervisor Simon Young. Jamaica, which sustained the brunt of Dean's destructive path in the Caribbean, came close to being hit hard enough to receive payouts from the Caribbean Catastrophe Risk Insurance Facility. "Had the storm been 30 miles to the north that would have triggered immediate payment in Jamaica,'' Young said from the Washington office of Caribbean Risk Managers Ltd., which oversees the insurance program.

8. Requirements for hazard instrumentation networks • System must have multiple stations • To ensure regional coverage (average station spacing 20-30km?) • To provide redundancy if a station fails • Instruments must be robust and have their own power supplies • Demonstrably able to withstand impacts and/or loss of power from a catastrophic event • Maintenance • Must be maintained by an agency that can demonstrate consistent standards of battery replacement and regular testing • Independence/Integrity • Must be run by an agency seen to be completely independent of potential interference from parties to a financial transaction. • (Can be a problem for some government organisations.)

9. 2nd generation Parametric Windstorm Index for Europe (based on c 300 windspeed measurements) Lower Basis Risk: • Industry loss estimates can be customised by Line of Business and Province/City Increased Granularity: • RMS Industry Exposure Database (IED) is at postal code resolution, enhancing the accuracy of industry loss estimates. Better Execution: • Increased transparency, simplicity and liquidity for investors translates into better execution.

10. Eurowind Index Look-up Table • The relationship between insured industry losses and peak-gust wind speeds are probabilistically estimated by application of the Europe Windstorm Model to the Industry Exposure Database • The Index Look-up Table relates an estimated industry loss per 2 figure postcode to a given wind speed in that postcode for each line of business; in effect representing a set of weighted average vulnerability curves.

11. Eurowind Index - Historic Performance • Daria was the most severe of a series of events that moved into Europe in early 1990. The storm caused a trail of destruction across southern England (where the highest peak gust wind speeds approached 44 m/s, or 100 mph), the Netherlands, Belgium, and Germany and caused significant insured losses in Denmark, France and Luxembourg • The index value of this event equates to an annual attachment probability around a “1 in 50 year” event • There have been no examples in recent years of a “1 in 100 year” or “1 in 250 year” event in the European Region

12. But existing stations fail during hurricanes • Existing stations are often deactivated during hurricanes • There is “survival bias” – stations that survive are the ones that experienced weaker winds

13. Weatherflow Hurricane Network • Anemometers rated to 220mph • Cellular link with 1Gb flash backup • Solar powered battery backup • Secure data transfer and storage • Ten-meter concrete poles • Overall station rated to 140mph

14. Designing a privately financed windspeed recording network for Florida

15. Earthquake recording in Japan

16. Second Generation Paradex earthquake ShakeMap Advanced NationalSeismic System zip centroid SA values & partner networks zip SA0.3sec, SA1.0sec, SA3.0sec     (interpolate) Paradex-EQEvent Bulletin zip Res C&I Residential Comml & Ind Initialset-up /update parametric industryloss indexvalues f( 0.3sec, 1.0sec, 3.0sec ) f( 0.3sec, 1.0sec, 3.0sec ) indexvalue indexvalue zone IndustryLossELT by zip & LoB      pre-compiled index value lookup tables (zip < zone < state) ?

17. Cap Discolored activatedindicatorsprovide depth reading New instrumentation How can we know that the flood was 12 feet deep? How did they know I dropped my phone in the bathtub? • Technology in use for hydrological applications (and cellphones) • Require routine servicing • Low cost (<$500/unit)

18. Low tech solutions have also been employed for 2nd generation parametric triggers • Flood heights can leave a mark on buildings • At pre-surveyed locations • Heights measured within a few days after ‘event’ • Audited by a highly reputable survey organisation

19. What can Governments and MLF Agencies do to foster parametric risk transfer? • 2nd generation parametric triggers provide viable low basis risk alternatives to insurance - in particular for developing countries • Requires installation of networks of hazard recorders around concentrations of exposure • Hazard recorders need to be highly robust and able to record without external power • Supported by an agency that can ensure the maintenance of the equipment and guarantee the objectivity of the observations • All organisations/institutions linked with the risk transfer mechanism need to have demonstrable long term integrity • Underpinned by models to structure and define index risk analysis However smart instrumentation can promote risk transfer !