STRESS IN THE SYSTEM? INSIGHTS INTO MODELLING IN THE WAKE OF TOHOKU

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1 STRESS IN THE SYSTEM? INSIGHTS INTO MODELLING IN THE WAKE OF TOHOKU Aspen Re June 13, 2012 James Few President, Aspen Re Aspen Insurance Holdings Limited

2 AGENDA Do we need near-term quake rates? Lessons learned from recent events Catastrophe modeling company reactions Underwriting considerations What is Aspen Re doing? AHL: NYSE 2

3 EARTHQUAKE RISK Source: USGS Earthquakes happen all the time We typically expect one Mw 8.0 or larger per year AHL: NYSE 3

4 EARTHQUAKE RISK 16 earthquakes > Mw 8.0 since to date: Mw 8.2 and Mw 8.6 in Sumatra Four recent quakes were large and relevant to our industry AHL: NYSE 4

5 THERE IS HEIGHTENED EARTHQUAKE RISK IN JAPAN Seismologist Shinichi Sakai made initial prediction USGS: 30-year probability rises from 35% to 70% (1) Annual probability rises from 1.3% to 3.9% Results depend on assumptions - inclusion of increased rate of small (Mw > 2) shocks - size of study area around Kanto region Aspen Re has adjusted catastrophe models to account for the heightened risk What can be adjusted in vendor cat models? AHL: NYSE (1) Toda, Stein & Lin (GRL, 2011). 5

6 JAPAN: SCIENCE AND MODELS MISSED LARGE EVENTS Maximum magnitude set in the catastrophe models for Tohoku region was Mw 8.2 (1) Mw 9.0 is 32,000 times the energy released by the Hiroshima bomb or ~15 times larger than the predicted Mw 8.2. Which other regions could experience large events? (1) AHL: NYSE National Seismic Hazard Maps for Japan, HERP (2005). 6

7 HAITI AND NEW ZEALAND: UNKNOWN FAULTS 2010: Mw 7.0 Haiti quake Léogâne Fault 2010: Mw 7.1 Darfield quake Greendale Fault 2012: two faults discovered near Bellingham, Washington (1) Is this uncertainty captured by vendor cat models? AHL: NYSE (1) Kelsey, H. M., B. L. Sherrod, R. J. Blakely, and R. A. Haugerud (J. Geophys. Res., 117, B03409, 2012). 7

8 NEW ZEALAND AND JAPAN: AFTERSHOCK MODELLING Aftershocks can produce insured losses larger than the initial event Aftershock activity can persist for many years Japan experienced as many Mw 5.0 aftershocks in 10 weeks after Tohoku as in the 10 years before (1) Source: USGS Source: USGS (1) AHL: NYSE Swiss Re, Lessons from recent major events (Jan. 2012). 8

9 NEW ZEALAND AND JAPAN: SOIL LIQUEFACTION Loosely packed, water-logged soil transforms to liquid with shaking Increases risk of landslide Property loss due to compromised foundations, cracks Where is liquefaction a significant risk? Niigata Earthquake, 1964 AHL: NYSE 9

10 LIQUEFACTION HAZARD DATA IS PUBLICLY AVAILABLE Oakland, California Scenario Event, Mw = 7.1 AHL: NYSE Source: USGS 10

11 JAPAN: TSUNAMI Exposed Japanese Coastline < 10 metres AHL: NYSE 11

12 JAPAN: TSUNAMI Aspen Re has studied tsunami risk in Southern Japan 1946 earthquake (Mw 8.1) generated heights up to 6 metres in this area Cat models will consider Japanese tsunami by 2013 What about worldwide tsunami risk? AHL: NYSE 12

13 FEW INSURED LOSSES ARE MODELLED IN JAPAN First release 1998 Current release 2010 Next release 2013 (1) First release 1995 Current release 2005 Next release 2012 (2) First release 2000 Current release 2007 Next release 2013 (3) Ground shaking Fire following earthquake Liquefaction Landslide Sprinkler leakage Personal accident Tsunami Dam breakage Other water damage Contingent business interruption LAE (1) AIR release will include tsunami (2) RMS release will include rate updates, tsunami accumulation footprints (3) EQE release will update rates, possible hazard update Modelled If User Entered Next release AHL: NYSE 13

14 CAT MODELING COMPANIES ARE RESPONDING: WHITE PAPERS February 2012 The M9.0 Tohoku, Japan Earthquake: Short-Term Changes in Seismic Risk RMS Special Report AHL: NYSE 14

15 UNDERWRITING CONSIDERATIONS Cat models can underestimate large tail events Unknown faults increase uncertainty Aftershocks and stress transfer can impact event rates Liquefaction, landslide and tsunami secondary perils are not fully considered but can cause significant losses Cat modeling companies respond with information but new model revisions take years The industry can respond now AHL: NYSE 15

16 ASPEN RE S PROPRIETARY MODELS Account for heightened event probability after Tohoku Include tsunami scenario events, e.g. Japan and Pacific Northwest Include severity loadings for secondary perils Consider business interruption Benefit from ongoing research and development AHL: NYSE 16

17 CONCLUSION (Re)insurers coped with several very large quakes in 2011 Our industry is key to the recovery of affected areas Reinsurance is effective but penetration rates are so low. How can we extend the important role of reinsurance? Know where there are gaps in current risk assessment Act now to engage cat model companies Leverage your own R&D Develop your own internal view of risk AHL: NYSE 17

18 THANK YOU