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Managing Extremes: Forecasting Climate and Capital in a Modelled World

Managing Extremes: Forecasting Climate and Capital in a Modelled World. IIS 46 th Annual Seminar, Madrid, June 2010 Rowan Douglas CEO Global Analytics, Willis Re Chairman, Willis Research Network. Managing Extremes in the Modelled World. Catastrophe model – exceedence probability output.

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Managing Extremes: Forecasting Climate and Capital in a Modelled World

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  1. Managing Extremes: Forecasting Climate and Capital in a Modelled World IIS 46th Annual Seminar, Madrid, June 2010 Rowan Douglas CEO Global Analytics, Willis Re Chairman, Willis Research Network

  2. Managing Extremes in the Modelled World Catastrophe model – exceedence probability output Loss Amount Return Period

  3. Natural Catastrophe and Insurer Security Example insurer: Capital requirement gross of reinsurance under EU Solvency 2 QIS4 Underwriting Market Default Operational 77% 20% 0% 3% Risk Based Capital Regulation via Modeling Extremes 3

  4. Models Create & Consume Capital Secondary Post 07 Base Modifier UK Flood SCR 362,306,050 304,898,030 481,258,080 0.0% -15.8% 32.8% Underwriting 329,678,240 270,984,530 450,279,460 Catastrophe 300,000,000 234,000,000 429,000,000 CapitalImpact -57,408,020 118,952,030 all figuresin £ Insurer Responses: - Master of Models, not servant - Science to reduce uncertainty 4

  5. Embracing Public Science 5

  6. The Rise of the Supermodel • Historical data is no longer sufficient • The industry is entering a new era of extreme climate & weather risk modelling • Simulation of planet’s climate system using high resolutions Global Climate Models • Improved evaluation of current risk levels • Global & regional teleconnections – diversification benefits

  7. Catastrophe Management is about Time and Space Dispersion,all storms (3-monthly storm transit counts) Dispersion, most intense storms (exceedance probability=20%)

  8. Operational Climate Forecasting

  9. The Second Space Age Flood monitoring (Infoterra) Global climate monitoring (NCEO) Haiti Earthquake/AlOS SAR (JAXA) Earthquake damage assessment (Cambridge) Sentinel – 3 (ESA) TerraSAR X (DLR) Cloudsat - NASA Building Stock Inventories (Quickbird/Cambridge)

  10. Global Earthquake Model

  11. Redefining Sustainability, Financial Security and Repositioning Insurance • Sustainability = avoiding or managing undesirable extremes within tolerable parameters • Unifying Financial Security, Sustainability and Poverty Reduction under a common philosophy and framework • Poverty reduction interventions should perhaps be focussed on helping communities avoid or manage intolerable impacts of extremes • As re/insurance enables society to understand, manage and share extreme risks at global and local scales via public and private mechanisms it is being repositioned at the centre of solutions of sustainability

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