© Stanhope by Hufton + Crow

IIS 46th Annual Seminar, Madrid, June 2010

Rowan Douglas

CEO Global Analytics, Willis Re

Chairman, Willis Research Network

Managing Extremes: Forecasting Climate and Capital in a Modelled World

Managing Extremes in the Modelled World

Return Period

Loss

Am

ount

Catastrophe model – exceedence probability

output

3

Natural Catastrophe and Insurer Security

Example insurer: Capital requirement gross of reinsurance under EU Solvency 2 QIS4

UnderwritingMarketDefaultOperational

77%20%0%3%

SCR 362,306,041

Underwriting 329,678,231Catastrophe 300,000,000

Market 69,468,900Default 0Operational 8,788,400

Risk Based Capital Regulation via Modeling Extremes

4

Models Create & Consume Capital

Base Secondary Modifier

Post 07 UK Flood

SCR 362,306,050 304,898,030 481,258,0800.0% -15.8% 32.8%

Underwriting 329,678,240 270,984,530 450,279,460Catastrophe 300,000,000 234,000,000 429,000,000

Capital Impact -57,408,020 118,952,030all figures in £

Insurer Responses: - Master of Models, not servant - Science to reduce uncertainty

Impact on Capital

0

10

20

30

40

50

60

Base Secondary Modifier RMS Post UK Flood event

Gro

ss S

CR

/ m

illi

on

s

5

Embracing Public Science

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

Catastrophe Management is about Time and Space

Dispersion,all storms (3-monthly storm transit counts)

Dispersion, most intense storms (exceedance probability=20%)

Operational Climate Forecasting

Building Stock Inventories (Quickbird/Cambridge)

Global climate monitoring (NCEO) Flood monitoring (Infoterra)

The Second Space Age

TerraSAR X (DLR) Sentinel – 3 (ESA) Cloudsat - NASA

Haiti Earthquake/AlOS SAR (JAXA) Earthquake damage assessment (Cambridge)

Global Earthquake Model

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