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Modeling Catastrophe Risk to Marine and Energy Exposure in the Gulf of Mexico

Modeling Catastrophe Risk to Marine and Energy Exposure in the Gulf of Mexico. Houston Marine Insurance Energy Seminar Hemant Shah, CEO Risk Management Solutions September 18, 2006. New Orleans, September 3 2005. 70-80% of New Orleans flooded,

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Modeling Catastrophe Risk to Marine and Energy Exposure in the Gulf of Mexico

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  1. Modeling Catastrophe Risk to Marine and Energy Exposure in the Gulf of Mexico Houston Marine Insurance Energy Seminar Hemant Shah, CEO Risk Management Solutions September 18, 2006

  2. New Orleans, September 3 2005 • 70-80% of New Orleans flooded, • 55% of the city’s 147,000 properties inundated by more than 4 feet • Maximum flood depths 18 feet.

  3. New Orleans Before the Pumps, 1888

  4. The Expansion into the Floodplain • Pumps initially deployed from 1913-1928

  5. 1915 “New Orleans” Hurricane • Cat 4 Hurricane, 20 miles east of New Orleans (Grand Isle) • “Whole country between Poydras and Buras inundated. Levees gone, property loss appalling. Life toll probably heavy. Conditions estimated worse than ever before. Relief needed. No Communications..." • Storm struck before the construction of the Industrial Canal • On the Mississippi River below New Orleans storm surge overtopped the levees below New Orleans and rose to 15-20 feet above sea level. • Swells rolled up the river in New Orleans 10-12 feet above high water. • Water was carried into Lake Pontchartrain and overflowed the existing levees to flood western part of the city • From the Old Basin canal (parallel to Orleans Avenue) to Broadway and from Claiborne Avenue to Lake Pontchartrain • Flooding 1-8 feet • After the passage of the storm the surge receded rapidly but the flood waters stayed in place for 3-4 days in New Orleans and had to be removed by the drainage system (from1915 Monthly Weather Review).

  6. The Expansion into the Floodplain • Second generation of pumps elevated to be able to function after a flood Bayou St. Jean at Lake Pontchartrain

  7. 1947 Hurricane • Cat 3 directly over the City • Surge overtopped LakePontchartrain levees • 17th St Canal wall failed • Up to 6 feet of water in parts of Jefferson parish • Standing water for weeks • Removed through cutting and blasting holes in the levees

  8. Growth of New Orleans

  9. New Orleans Canals Industrial Canal (link between Lake Pontchartrain and Mississippi R) 1923 Developed after 1945 Misssippi River Gulf Outlet 1965 Drainage Canals Mid 19th Century Inner Harbor Navigation Canal 1923

  10. 1965 Hurricane Betsy • Cat 3 Hurricane • 12 foot storm surge • 60,000 homeless

  11. 1965 Hurricane Betsy - Presidential Response

  12. 2005 Hurricane Katrina - Presidential Response

  13. 100 Years of Storm Surge Flooding 1915 1947 2005 1965

  14. One Disaster Sets The Terms For The Next

  15. “I want to give positive assurance that our friends will find Miami this winter the same enjoyable, hospitable, comfortable vacation city it has always been. I predict that Miami will make a world record come-back…we are ready to resume our place as the playground of the world” Miami Mayor E.C. Pomfh …speaking six days after the September 18, 1926 storm struck south Florida Mayor Pomfh’s Vision…

  16. 1990 Population of Dade and Broward alone exceed that of all 109 coastal counties (TX – VA) in 1930 Of 67 coastal counties in LA ->FL, pop. density is 2.5X national average During the Florida construction boom from 1970 – 1990: 70% of buildings in Broward and Palm Beach counties built in this period 75% increase in the population density in SE Florida Commercial values almost tripled in value The trend continues; from 1990 to 2000: The population of Broward County increased by 29%, and Collier County by 65% Currently, 1,540 building permits issued in coastal counties every day Mayor Pomfh’s Vision…Realized

  17. U.S. Hurricane Risk, RiskLink v6.0 “Tail” (Hurricane) Probability $40 – 60BKatrina $120 – 250B Miami Cat 5, NYC Cat 4 $300 – 350B “Worst Case” Loss

  18. 90 $82 billion 80 70 Personal lines 60 $55 billion 50 Loss ($billion) Personal 40 lines 30 Commercial 20 lines Commercial lines 10 - Increase in one-in-250-year loss Capital increase The Capital Crunch will Catalyze Change • New capital entering the market? • Capital markets alternatives? • Shortage of cover • Change in market architecture?

  19. What is a Catastrophe Model?

  20. Utility of a Catastrophe Model Geography of Risk Demographics of of Risk (Gross/Net) Probability of Risk (EP Curve)

  21. Offshore Platform Modeling FrameworkRMS RiskLink v6.0, Released May, 2006 Define Hurricane Claiming • Storm parameters • Basin-wide tracks, realistic time histories • Onshore and offshore “clash” • Time-stepping windfield calculations • Windspeed and wave height • Submarine landslide • Physical damage (PD) • Loss of production • BI, CBI, OEE

  22. Recent Storms to Impact the Offshore GOM Plot of maximum windspeeds - 2002 to 2005 Lili, Ivan, Katrina & Rita

  23. Recent Storms to Impact the Offshore Region • 94% of the 4,200 offshore platforms in GOM experienced Cat 1 winds or greater from 2002-2005

  24. Hurricane Losses to Offshore ExposureIvan (’04), Katrina and Rita (’05) Obtained from various industry sources

  25. Lessons Learned of Relevance to Offshore Energy • Frequency and intensity of hurricane activity • Likely to face elevated levels of hurricane activity over at least the medium term • Prior modeling practice, based on long-term historical averages, underestimated the occurrence of intense storms • Vulnerability to damage and insured loss • Physical damageability of platforms (et al) greater than previous expectation • Time element risks are significant, and must be modeled • Greater variability in risk to various classes of exposure • Making the transition from 1st to 2nd generation models

  26. Frequency of Hurricane Activity

  27. A Conspiracy Between Mother Nature and Developers? Category 3-5 Atlantic Basin Hurricanes 1901-2005 and 5-year running average Sustained period in population growth and economic development of coastal Gulf and SE regions of the U.S.

  28. 0.9 = Ave. from 1995 - 2005 0.6 = Average from 1900 - 2003 Decadal moving average US Landfalling Cat 3-5 Hurricanes

  29. o 0.5 C o C Tropical Atlantic Sea Surface Temperature Departures (ºC) During Aug-Oct (1951-2000 Base Line) 0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 -0.8 1950 1970 1990 1960 1980 2000

  30. Hurricane Activity on the Rise? Named Storms 11 15 28 13-16 Hurricanes 6 9 15 8-10 Cat 3-5 2 6 7 4-6 Cat 5 0.4 1 4 N/A US Hurricanes 1.6 6 5 88% US Cat 3-5 0.7 3 4 81% Initial 06 Forecast“Very Active” Average 1950-2005 2004 2005 Other factors, including temporal and geographic expansion of the basin; and sustained intensity of storm

  31. NOAA Declares the Onset of an El Niño • September 10th, 2006 “Scientists at the NOAA Climate Prediction Center reported that El Niño conditions have developed in the tropical Pacific and are likely to continue into early 2007…Ocean temperatures increased remarkably in the equatorial Pacific during the last two weeks.” "Currently, weak El Niño conditions exist, but there is a potential for this event to strengthen into a moderate event by winter…also, the development of weak El Niño conditions helps explain why this Atlantic hurricane season has been less active than was previously expected.” “El Niño typically acts to suppress hurricane activity by increasing the vertical wind shear over the Caribbean Sea region. However, at this time the El Niño impacts on Atlantic hurricanes are small. We are still in the peak months of the Atlantic hurricane season, and conditions remain generally conducive for hurricane formation.”

  32. Tropical Cyclone Catarina Brazil March 26th – 27th 2004 First S. Atlantic Hurricane? Hurricane Ivan (Cat 5) Longest lasting Intense Hurricane Sept 5th – 16th 2004 Expansion of the Atlantic Basin? Hurricane Alex (Cat 3) most intense N of 38N Aug 3rd - 5th 2004 Hurricane Wilma (Cat 5) most intense Atlantic Hurricane – 882 mb Oct 18th – 25th 2005

  33. Vigorous & Visible Debate on Climate

  34. Climate Change Debate and Hurricane Activity • The WMO (World Meteorological Organization) has released a statement on the current state of debate • “The division in the community is not as to whether Global Warming can cause a trend in tropical cyclone intensities. Rather it is on whether such a signal can be detected in the historical data base.” • “Whilst the existence of a large multi-decadal oscillation in Atlantic tropical cyclones is still generally accepted, some scientists believe that a trend towards more intense cyclones is emerging.” • “No single high impact tropical cyclone event of 2004 and 2005 can be directly attributed to global warming, though there may be an impact on the group as a whole.” Prepared by the WMO/CAS Tropical Meteorology Research Program, Steering Committee for Project TC-2: Scientific Assessment of Climate Change Effects on Tropical Cyclones. February 2006

  35. The Climate Change Trend v 1930 1930 1950 1950 1970 1970 1990 1990 2010 2010 2030 2030 RMS Expert Elicitation, October 2005 Jim Elsner Professor Florida State Kerry Emanuel Professor, MIT Mark Saunders Professor, University College London Tom Knutson GFDL, NOAA, Princeton, NJ The Multidecadal Cycle activity

  36. 20% OP increase in rates Geography of Hurricane Activity IncreaseChanges in CAT 3-5 Activity vs. 1900-2005 Cat 1-2: 21% increase in activity Cat 3-5: 36% increase in activity + 15 - 20% + 20 - 30% + 30 - 45% + > 45%

  37. Vulnerability to Damage and Insured Loss

  38. Comparison of Industry Platform PD Losses to Modeled Estimates

  39. Development of Vulnerability Curves • Approach • Analytical damage assessment • Detailed platform hurricane damage analysis reports • Evaluation of structural response to wind and wave action • Design guidelines • Detailed analyses of historical claims data • Vulnerability curves are functions of: • New construction classes • New year-built ranges • New occupancy classes • Modeling of OEE • Modeling of CBI • OP specific loss amplification

  40. Shallow Water Fixed Up to 1971 Post 1971 Deepwater New Construction Classes RiskLink® 5.0 RiskLink® 6.0 { • Jackups • Caissons/Well Protectors • Up to 1971 • Post 1971 • Fixed • Up to 1971 • 1972 – 1980 • 1981 - 1993 • Post 1993 • TLP/Spar • Semi-submersibles • Drillship {

  41. 6.0: Jackups 5.0: Shallow Water MDR Wind Speed/Wave Mobiles Jackups • Used for drilling new wells – move from location to location • Design Requirements • 10-Yr API Design • Wind (1-min): 78 mph • Significant wave height: 26 ft • Typical damage mechanisms • Failure of legs and separation of hull Ocean Warwick after Katrina

  42. 6.0: Semis 5.0: Deep Water MDR Wind Speed Mobiles Semi-Submersibles • Used for drilling new wells – move from location to location • Design requirements • Mooring line design criteria: similar to Jackups • Rig itself designed to more stringent criteria • Typical damage mechanisms • Mooring lines break • Anchors dragged

  43. 6.0: Caisson Up to '71 6.0: Caisson - Post '71 5.0: Shallow Water Platforms in Shallower Water Caisson/Well Protector • Design requirements • No design guidelines pre-1971 • Typically 100-yr winter storms/sudden hurricanes • Typical damage mechanisms • Damage to deck and rails • Bending of well jacket MDR Wind Speed

  44. 6.0: Fixed-Pre '71 6.0: Fixed-'72 - '80 6.0: Fixed-'81 - '93 6.0: Fixed-Post '93 5.0: Fixed - Structure Upto 1971 5.0: Fixed - Structure Post 1971 Platforms in Shallower Water Fixed Platforms • Design requirements • No design guidelines pre-1971 • Typically 100-yr design criteria • Further changes in 1980 and 1993 • Typical damage mechanisms • Wave-in-deck • Buckling of legs MDR Wind Speed

  45. 6.0: Drillships 5.0: Deep Water MDR Wind Speed Platforms in Deeper Water Drill Ship • Used for drilling new wells – move from location to location • Typically of modest risk since drill ships can be moved away from path of inbound storms

  46. 6.0: TLP/Spars 5.0: Deep Water MDR Wind Speed Platforms in Deeper Water TLP/Spar • Design requirements • Stringent design guidelines • Designed for deeper waters • Typical damage mechanisms • Wave-in-deck • Wind damage to topsides Damage to Mars during Katrina

  47. Loss of Production Income (LoPI) Modeling • Business Interruption (BI) • Direct physical damage caused to the platform • Modeled through effective downtime • Contingent BI (CBI) • Damage to upstream facilities typically not owned by assured • Pipeline • Mudslide • Falling objects such as collapsed platforms • Anchor drags • Other platforms that serve as collection/processing hubs • Damage to onshore facilities

  48. Reported Modeled Number of Wells Lost Ivan Katrina Rita Operator’s Extra Expense (OEE) Modeling • Coverage includes: • Control of well • Redrill costs • Modeled for: • Caisson/Well Protectors • Fixed platforms • Platform needs to be severely damaged/ collapsed • OEE vulnerability functions based on the probability of severe platform damage • Validated on MMS Well information

  49. Change in Modeled PD Risk, Industry Aggregate 2006 IED

  50. Evolution in Re/insurer Modeling and Risk Management Practice

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