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Managing man-made catastrophe risk: A market perspective

Managing man-made catastrophe risk: A market perspective. CAS Special Interest Seminar on Catastrophe Risk Management Atlanta, 7 October 2002 Thomas Holzheu Swiss Re. Catastrophe Events 1970 – 2001. # catastrophes. Source: sigma 1/2002. Man-made catastrophes in 2001. # catastrophes.

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Managing man-made catastrophe risk: A market perspective

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  1. Managing man-made catastrophe risk:A market perspective CAS Special Interest Seminar on Catastrophe Risk Management Atlanta, 7 October 2002 Thomas HolzheuSwiss Re

  2. Catastrophe Events 1970 – 2001 # catastrophes Source: sigma 1/2002

  3. Man-made catastrophes in 2001 # catastrophes Source: sigma 1/2002

  4. Number of victims 1970 – 2001 # cat victims,logarithmic scale Source: sigma 1/2002

  5. Insured losses [property only] 1970 – 2001 Insured losses,2001-$ billion Source: sigma 1/2002

  6. Catastrophe Figures (property only)2001 vs. Average 2001 Average 1987-2001 • Insurance Losses (USD bn) • Natural Catastrophes World 10.0 14.3 • USA 8.0 9.1 • Man-Made Events World 24.4 5.9 • USA 19.9 2.7 • Nat Cat per Peril (World) Storm 7.2 8.9 • Earthquake 0.6 1.6 • Flood 0.1 0.8 Fatalities World 33 000 41 000 USA 3 451 800 Source: Swiss Re, sigma

  7. 9/11 consensus loss estimates: 40.2 billion in total Source: Insurance Information Institute

  8. How was terrorism insured? • Historically, fire insurance covered fire and explosion damage regardless of its cause. • Exceptions were war, civil war and civil commotion. Terrorism was not mentioned in war exclusion clauses. • Countries with frequent terrorism experience had special regulations or pool solutions with government support in place (UK, Spain, South Africa and Israel).

  9. The global insurance system passed the stress test • The insurance industry will fulfill their contractual obligations regarding WTC losses. • Insurers didn’t initiate a sell off of stocks. • Global insurance diversification worked. Losses were spread widely between US insurers and global insurers as well as between primary insurers and reinsurers.

  10. Limits of insurability are challenged! • Terrorism risk is hardly quantifiable today, diversification very hard to achieve. • Capital markets don’t like the risk, therefore a very high risk premium is needed to provide cover. • Not only insurers have to learn how to assess and manage the new risk, but also financial analysts and rating agencies have to be educated. • The main problem is the extremely high and unpredictable loss potential --> 40 Bn USD x ??

  11. The number of terrorist attacks in 2001 actually declined! # attacks Source: US Department of State

  12. North-America shows the lowest frequency of terrorism [1996-2001] # attacks Source: US Department of State

  13. 8 of the 10 most costly terrorism losses occurred in US and UK Insured loss* Victims Date Event Country 21 000 3054 2001 Terror attack against WTC, Pentagon and other buildings USA 907 1 1993 Bomb explodes in London’s City (near NatWest tower) UK 744 - 1996 Bomb explodes in Manchester UK 725 6 1993 Bomb explodes in garage of WTC USA 671 3 1992 Bomb explodes in London’s financial district UK 398 20 2001 Suicide bombing at Colombo International Airport Sri Lanka 259 2 1996 Bomb attack on London’s South Key Docklands UK 145 166 1995 Bomb attack on government building in Oklahoma City USA 138 270 1988 PanAm Boeing 747 crashes at Lockerbie due to bomb explosion UK 127 - 1970 Three hijacked passenger airplanes dynamited in Zerga Jordan *) in USD m, indexed to 2001 , property and business interruption only Source: Swiss Re, sigma No. 1/2002, Insurance Information Institute

  14. WTC losses reduce the reinsurers’ equity by 10 to 25% Source: Morgan Stanley, March 28th.

  15. 137 Capital Myth: P/C industry has $300 billion to cover terrorism Surplus 12/2001$289 billion In $ billions ”Target” commercial includes: Commercial property, liability and workers’ comp. Sources: A.M.Best, Swiss Re Economic Research & Consulting

  16. Commercial lines surplus is quite stretched as is In $ billions Sources: [1] A.M.Best, [2] Fox-Pitt, Kelton, [3] Morgan Stanley, [4] Swiss Re Economic Research & Consulting

  17. Summary Natural Catastrophe: “Business as usual” • 2001 loss burden below average • upward trend, high fluctuations • further premium increases necessary • huge loss potentials persist Man-made: Dealing with the new Spectre • new risk landscape, exploration has started • apply experience from other extreme risks • balance carefully: risk appetite, exposure control, risk and return • public-private partnership for a limited time

  18. Questions? To be put on the mailing list for Swiss Re’s sigma contact: thomas_holzheu@swissre.com Or, download our sigma research from http://www.swissre.com

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