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Marine Catastrophe Modeling: Navigating the Challenges, Charting the Opportunities

1 the World’s First Cargo Cat Model

Our global economy is increasingly interconnected. International trade and complex supply chains rely on a vibrant shipping that transported $10 trillion in cargo in 2014, a volume that has quadrupled since took in the 1970s.

Insurance is essential to a resilient marine cargo industry. And while marine coverage is one of the world’s oldest forms of , the rapid changes in global trade raise new challenges. Not only has the volume of international trade expanded as vessels grow larger and expand, the industry is exposed to greater correlations and accumulations of risk.

Two recent catastrophes have highlighted the importance of risk and accumulation in cargo and its correlations with other lines of insurance. In Hurricane Sandy, billions of dollars of claims resulted from a high concentration of cargo, watercraft, and specie risk — losses which clashed with the wider property losses caused by storm. More recently, the Tianjin explosions led to a record-breaking amount of cargo loss.

In 2015, RMS set out to develop the world’s fi rst global model to provide the marine cargo and specie market with tools to better understand its catastrophic risk accumulations and correlations Sponsors with other insured lines of business. To do so, we partnered with seven leading marine (re)insurers, and with their guidance and data, have now completed this model, with coverage across almost The views provided in this report are those of RMS. We are grateful for the advice, comments, and feedback 80 countries. As an outgrowth of this collaborative development eff ort, this report is intended of our steering committee members from these sponsoring clients. to raise awareness in the marine industry about its risk to catastrophic loss, and to provide the insights and tools to not only improve practice, but to innovative and create new fi nancial and risk transfer products for a growing and vital market.

Hemant Shah President, CEO, and Co-Founder Risk Management Solutions Table of Contents

Introduction ...... 5 Current State of the Market ...... 11 A Better Approach to Cargo and Specie Modeling ...... 12 Vulnerability ...... 12 Exposure Accumulation ...... 16 Cargo and Specie Disaster Scenarios ...... 19 Best Practices for Marine Cargo Catastrophe Modeling ...... 27 The Future of Marine Cargo Modeling ...... 30

Introduction

In the days leading up to Hurricane Sandy’s landfall at the Port of New York and New Jersey in 2012, longshoremen worked relentlessly to secure equipment, unstack cargo, and evacuate personnel. The preparation helped protect employees and allowed for a quick recovery; many terminals were accepting new traffi c within a week. However, these preparatory measures incorrectly assumed that strong winds would be the primary driver of cargo damage. In fact, it was a 14-foot storm surge that inundated unstacked shipping containers, new on open lots, and other cargo — cumulatively, all worth billions of dollars.

The surge’s devastating eff ects on marine cargo became apparent when claims adjusters began their the following week. In total, 16,000 autos were lost, 7,500 loaded containers were fl ooded, and more than 100 miles of railcars were damaged. Marine claims from the event totaled over $3 billion, the costliest losses in the line’s history.

Sandy was the latest of several signifi cant marine losses in the 21st century. Just 10 months earlier, the Costa Con- cordia ran aground off the coast of Tuscany, causing insured losses of more than $2 billion. And since these events, the explosions at China’s Port of Tianjin in August 2015 resulted in an estimated $5 billion insured loss, another record-setting event for cargo risk.

This succession of large losses has prompted many in the industry to question whether, given the rapid growth in global trade, these events have become the new norm for the marine industry. The purpose of this report is to explore this question in detail, highlighting the catastrophe exposure of key global ports, the risk management practices that aff ect cargo fragility, and the implications for the insurance industry.

5 The Containerization Revolution

Prior to 1960, global shipping was cumbersome, time took two decades for the industry to agree on global consuming, and expensive. Tariffs and freight fees were container standards, the ultimate benefits cannot be paid at every stage of a journey and each shipping understated. Containerization is responsible for dra- line had different sets of packaging and transportation matic reductions in shipping costs and time, standards. Longshore operations were entirely manual and corresponding increases in efficiency and reliability. and cargo theft was pervasive. Consumer previously limited to luxury markets, such as fresh produce and foreign autos, became avail- Malcolm McLean, an iconoclastic American transport- able to a wide consumer base. This, in turn, further in- ation entrepreneur, invented and operationalized the creased the demand for trade. Between 1970 and 2010, first intermodal shipping container in 1956 — an inven- global sea-based trade nearly quadrupled. tion with tremendous potential that went unnoticed for several years. His solution was simple: using plain Today’s largest container can carry more than containers of standardized dimensions which could 18,000 containers at capacity. Many of the largest easily be stacked and seamlessly accommodated by ports have automated operations and annually process , trains, and ships. hundreds of billions of dollars of cargo. This has led to faster turnaround and greater cost efficiencies. But But over time, McLean’s eventual success led to wide- from an insurance and value accumulation perspective, spread acceptance of container shipping. Although it it has created new challenges.

International Seaborne Trade Tons Loaded (MM) Malcolm McLean at Port Elizabeth Image by Maersk Lines 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1970 1980 1990 2000 2010

6 The Growing Impact on Insurers The Need for Managing Cargo Cat Risk

Cargo containerization benefitted the global economy, units) of container cargo each year. If these containers Property insurers have embraced catastrophe risk • What is the relative risk of different categories of but it created new catastrophic risk exposures for insur- were laid end to end, they would circle the earth more models to understand their exposure to hurricanes, cargo, such as autos, electronics, temperature- ers. As the size of container ships grew, the capacity of than five times. Therefore, any large marine insurer can earthquakes, and floods. Even “movable exposure” controlled goods, and petroleum products? ports and storage facilities increased to accommodate expect to have significant accumulations of insured such as workers compensation and is • What is the likelihood the same catastrophe them. Larger vessels rendered many river ports inacces- cargo in cat-exposed ports. actively managed. The same framework should be used causes losses to other lines of business within sible, necessitating their consolidation with seaside ports for cargo risk, providing actionable results to assist in my company? where cargo became more vulnerable to windstorm and Exacerbating the challenges of this risk is the fact that key risk-management decisions such as: • What is the impact of greater geographic storm surge. Many of these ports were built on , cargo is mobile. Unlike and their contents, diversification of my ? Can I achieve the amplifying their vulnerability to liquefaction in the event whose locations are fixed and whose values are well • How much cargo exposure have I accumulated in a same benefit from purchase? of a major earthquake. understood, cargo moves frequently and its at-risk given location? value can be volatile over time. While real-time shipment • What are my potential losses in a broad range of The same catastrophe models used by property in- The size of today’s ports was unimaginable a few tracking is standard in trade, the marine industry catastrophic events and how likely are those events surers can successfully be used by cargo insurers to decades ago. Shanghai, the world’s largest port, turns currently lacks the mechanism to insured - to occur? manage their risk. Historically, property and marine loss over more than 30 million TEUs (twenty-foot equivalent ments with any meaningful precision. • How much should I price for the catastrophe load have been well correlated; both lines are affected in associated with a given location? similar ways by extreme weather events. Thus, the two lines of business should be analyzed together.

Global Seaborn Trade

Top Container Ports, 2014

Million Port Country Notable Characteristics TEU

Shanghai China Gateway port, Yangtse River Delta 35.29

Singapore Singapore Large port 33.87

Shenzhen China Walmart’s Asia HQ, global procurement center in its economic zone 24.03

Hong Kong China Until 2004, the world’s largest port 22.23

Ningbo- China Two ports merged in 2005 19.45 Zhoushan

Busan South Korea Large expansion plans pending 18.68

Qingdao China Transshipment and reefer specialty hub 16.62

Guangzhao China Direct trading partner with Taiwan 16.16

Jebel Ali Dubai Stated goal is 100 million TEU capacity by 2020 15.25

Tianjin China Largest port in North China; site of severe explosions in 2015 14.05

Rotterdam Netherlands Two new recent terminals 12.30

Port Klang Malaysia Regional trading hub 10.95

Kaohsiung Taiwan Has direct trading access with mainland China 10.59

Dalian China Deepwater port listed on the China stock exchange 10.13

Hamburg Germany Large rail hub 9.73

TEU = twenty foot equivalent units

Source: I.H.S.

9 Current State of the Market

Marine insurers are increasingly aware of the need to quantify and manage cargo catastrophe risk, but must address many challenges in order to do so. Cargo exposures are subject to different perils as they move around the globe, values are volatile, and loss-adjustment practices vary by region. Furthermore, most catastrophe models used in the industry today are not currently designed to assess cargo fragility.

Managing cargo risk today involves a series of cat modeling workarounds. For exposure accumulation, value is assigned to a single location — often the center of the port, even though ports are non-contiguous and can extend for dozens of miles. The value is then modeled as “ contents,” without regard to the nature of the cargo or how it is stored. For example, pharmaceuticals in refrigerated storage, bulk grain in silos, and electronics in containers might all be lumped together and modeled as the same “contents,” although their actual vulnerability varies drastically.

This approach can be improved in several ways. First, taking account of the physical characteristics of the cargo, its storage configuration, and its salvage potential will greatly improve vulnerability estimation. Second, estimating exposure in large ports and capturing key features of the port itself such as elevation, liquefaction potential, and stor- age structures will provide a more accurate view of potential loss outcomes. For high-gradient perils like storm surge, this can be instrumental in distinguishing vulnerable accumulations from resistive ones.

11 RMS Cargo/Specie Categories

A Better Approach to Category (Occupancy) Storage Configuration () Cargo and Specie Modeling Automobiles Special Facility Break Bulk Silo Dry Bulk Tank Liquid Bulk Gas Tank RMS partnered with seven market-leading insurers, reinsurers, and Consumables Inside Warehouse at Port

brokers to address a market need for cargo and specie modeling. Temperature Controlled Containerized–Inside Warehouse The resulted in a purpose-built model that encompasses Electronics Containerized–Stacked Outside Open Lot or Stockpiled Outside many critical aspects of cargo exposure, vulnerability, and insurance General Cargo At Destination–Warehouse contract provisions that are often overlooked in today’s property At Destination–Retail cat models. The following section describes some of the key Petroleum Products Museum or Institution Pharmaceuticals Retail or Private Building considerations made throughout the development process. Project Cargo General Specie Fine Art & Collectibles Vulnerability Cash in Transit Jewelers Block

Product Classification “Cargo” is a broad term that can include anything from petroleum in steel tanks to Salvage Value farm animals, housewares, and electronics. The maritime industry classifies cargo using a broad but cumbersome system of 6,500 “harmonized system codes” that One of the most influential variables influencing cargo-loss outcome is salvage become increasingly specific as the length of the number grows. For example, 01 value, which can vary widely by product. Jewelry that is inundated by a storm corresponds to “animals,” but 0101 is “horses” and 010111 is “breeding horses.” RMS surge can be dried out and easily resold. Electronics, however, would most likely be has more broadly grouped these codes according to their relative vulnerability. declared a total loss in the event of water damage. Also, certain products, such as pharmaceuticals and consumable goods, have strict regulations mandating their disposal if compromised or damaged. These considerations must be explicitly addressed in a catastrophe model to properly assess cargo vulnerability. Storage How cargo is stored plays an important role in how it performs during a catas- Cargo policy provisions can greatly influence salvage value as well. “Control of trophe. Stacked containers are vulnerable to wind, but high stacks are largely Damaged Goods,” a common clause, gives policyholders the ability to control protected from storm surge. Precious cargo stored in vaults is safe until extremely the extent to which their damaged goods are sold or scrapped. “Brand Protection high wind speeds, while autos on open lots can be damaged with modest gusts. Clauses” extend additional limits for logo and trademark removal and allow the prevention of salvage if logo removal cannot prevent identification of the man- Storage and packaging configurations must be considered when modeling cargo ufacturer. Any cargo model must allow for the explicit modeling of these provisions. risk. Through extensive research, RMS learned that certain products are likely to be stored in specific ways. Thus, in the absence of specific underwriting informa- Relative Salvageability of Cargo Types tion, the RMS model will default to the most likely storage configuration for a given product type, or vice versa. For example, if the exposure is coded as “autos” but High Salvageability Low Salvageability storage is unknown, the model defaults to “open lots,” the most common type of storage for autos. Conversely, if the product type is unknown but storage is coded as “silos,” the model chooses “dry bulk,” the most common type of cargo for that Jewelers Block Liquid Bulk General Cargo Automobiles Consumables Pharmaceuticals storage type.

12 13 Packaging and Protection Vulnerability by Region–Dry Bulk Stored in Silos Consider the example of two locations affected by a hurricane, where both locations are subject to a Cargo underwriting, pricing, and risk selection are 115 mph peak gust and sustain structural damage: largely based on the strength of packaging and pro- tection procedures. Shipments that are subject to Central America • Location A is a low-rise office building with typical strict, standardized packaging and storage procedures Caribbean office contents such as computer equipment, elec- are viewed favorably, while those with less-formalized Mexico tronics, office equipment, tables, and chairs. loss-control measures can face declinations and is a warehouse with containers full of Canada • Location B underwriting penalties. Catastrophe modeling of cargo plastic-wrapped office chairs whose final destina- US should mirror its risk selection, and these measures tion is an office-supply store. should be considered in vulnerability assessment. Europe Damage Ratio Hong Kong In this example, Location A’s contents loss is likely to Japan be more severe than Location B’s cargo loss for the Specie following reasons:

Specie is priced and underwritten differently than Wind Speed • Location B’s cargo is triple-protected: by the ware- general cargo, and its catastrophe modeling must house itself, by the shipping containers inside the accommodate this uniqueness. RMS undertook exten- warehouse, and by the individual product pack- sive research on specie, interviewing museum curators, aging. Location A’s contents are unprotected by gallery managers, and fine-art insurance specialists to Cargo versus Contents anything other than the structure. understand the precautions taken to protect specie • Each chair in Location B is individually packaged Today, most cargo is modeled as “building contents.” and their impact on loss outcome. and ready for sale. Thus, it is likely that at least This practice tends to overestimate loss because cargo some chairs will survive the storm intact. can be less vulnerable than contents. There are two The RMS cargo model offers specie categories in four • A salvage sale of location A’s heterogeneous office reasons for this difference. First, cargo is packed for general areas: general specie, jewelers block, cash in equipment is unlikely. For location B it is plausible. shipment and enjoys greater protection than contents, transit, and fine art and collectibles. It takes into account which usually carry no packaging at all. Second, the different storage configurations that accommodate the There are several circumstances where cargo may be salvage value of cargo is much higher than that of extensive protection measures offered by museums more vulnerable than contents. These include when contents, because cargo consists of items ready for (and the lack thereof in private residences), as well as portfolios carry large volumes of autos, pharmaceuti- sale, and thus can be re-sold if properly recovered. various options governing specie loss such as: cals, or sensitive equipment.

• Specie storage (inside vault, outside vault, or window display) • Sprinkler type (wet or dry) • Salvage value • Specie protection levels

Regional Vulnerability Differences As with property models, vulnerability profiles for cargo storage can differ by region. This is due to several fac- tors, including port procedures, construction standards for storage facilities, and regional and national disas- ter preparedness. RMS recently conducted a detailed regional cargo study to examine international cargo protection practices. Compared with the U.S., cargo in Central America, the Caribbean, and China tends to be more vulnerable, mainly due to port, storage, and ware- housing characteristics.

Heavily worn silo 15 Exposure Accumulation Spatial of Cargo

Ports are not single locations. They consist of dozens and creating a proprietary methodology for accurately On August 12, 2015, a series of large chemical of terminals that can be non-contiguous and extend for allocating port exposure. This analysis formed the basis explosions in a warehouse at the Port of Tianjin long distances. Each terminal in a port typically spe- of our port IEDs. led to the deaths of 173 people and the destruc- cializes in handling a different kind of cargo: some are tion of 8,000 new cars, thousands of full shipping designated container terminals, others are tank farms, In catastrophe management, port accumulation containers, a metro station, and dozens of ware- and yet others are bulk processing facilities. The Port of analysis often involves geocoding all exposure to a houses and apartment buildings. The insured Tianjin, for example, consists of nine separate areas and single point and modeling it as contents. The green cargo loss alone was estimated at $5+ billion. 150 berths spanning more than 18 miles (30 kilometers) bars in the graph below show the result when this along the coast of Bohai Bay in China. procedure is followed, using two key terminals at the Port of Tianjin Explosions Port of New York and New Jersey. This method can 21 ton TNT equivalence Because of the fragmented layout of ports, under- significantly understate or overstate loss (as seen standing the spatial distribution of cargo risk at a high below) because commodity class and spatial distri- 8,000 autos destroyed resolution is important. This is particularly true for bution are not considered. Damage to commercial and residential high-gradient perils like flood and storm surge, where the risk can vary substantially depending on the exact Instead, the red bars show cargo that is geocoded to structures > 2km from blast site location within the port. The RMS geospatial team the appropriate terminals and designated as specific 170 dead, 800 injured, 3,500 homeless analyzed thousands of square kilometers of satellite . This approach provides a clearer picture imagery from top global ports, identifying the move- of the variability in loss within a given port or terminal. Insurance loss of $5+ billion ment of cargo throughout different image vintages,

The event was a dramatic illustration of the concentration of cargo in large ports. Tianjin is the Loss Costs By Product world’s 10th busiest container port; it processes Port of New York/New Jersey 70 percent more containers than the biggest U.S. container port, Los Angeles. As insurers began to disclose their loss estimates in shareholder filings Port Jersey–Generic Contents over the next few months, an alarming picture Automobiles emerged: six reported losses of over $100 million, Temperature and many more disclosed claims that would materially affect their earnings. Dry Bulk

Heavy Industry In the wake of the Tianjin event, it became clear Pharmaceuticals that most insurers had little knowledge of the exposure they had accumulated in the port. The Consumables event served as a catalyst for improving accumu- Break Bulk

lation management practices in cargo. RMS is con- Electronics structing port-insured exposure databases (IEDs) Port Elizabeth–Generic Contents for key global ports, to enable accurate market- share analysis. The IEDs will estimate average and General Cargo

peak exposure segmented by product, storage 10 1,00 1,000 10,000 configuration, and terminal. They will catalog and Loss Cost Per $1 Million USD Exposure Wind + Surge geocode important port storage structures in RMS Industrial Exposure Database order to provide the most detailed view of port

exposure on the market. Contents–Geocoded to a single point Cargo–Spatially distributed throughout terminals The following sections outline the individual areas of research examined by RMS in develop- ing the IEDs.

16 17 Cargo Dwell Time Port Characteristics

Catastrophe models assume that insured value is at Accounting for port characteristics in cargo modeling risk 365 days a year. Modeling cargo that way, however, can materially infl uence modeled loss. In the develop- would overstate the risk, as mobile exposure is only at ment of our port IEDs, RMS conducted a detailed ex- risk for the time spent at an insured location. Since amination of each terminal, cataloging many important exceedance probability is expressed as an annual num- features, including: ber, cargo models must consider cargo loss propor- tional to the total days per year it spends at risk. The • Terminal-specifi c storage structures — Specialized RMS marine model adds exposure attributes that terminals have many tanks and silos for the storage account for “dwell time,” the amount of time cargo of bulk commodities, , and petroleum. These spends in port, and adjusts model output accordingly. structures have high contents value but are rela- tively resistive to wind and surge loss. Dwell time plays a major role in cargo risk, as higher • Elevation — Port facilities are close to sea level and dwell time corresponds with higher loss potential. RMS quayside cargo is highly vulnerable to surge and conducted extensive dwell-time research and found fl ood loss. Elevation is a sensitive variable in port several important factors in its determination: catastrophe analysis. • Geotechnical profi le — Terminals built on landfi ll • Automation — Some ports have highly automated can experience an amplifi cation of ground shaking and effi cient port operations, which allow for faster in an earthquake, increasing the likelihood of loading, unloading, and routing of cargo. severe damage. • Import/export ratio — Imports are subject to • Multistory — Storing cargo above and inspection, delaying their turnover. ground level can mitigate the eff ects of a storm Therefore, ports that are net importers can have surge. Some regions have a higher proportion of longer dwell times. multistory warehouses in their industrial building • Labor relations — Particularly in the U.S., port slow- stock. This should be considered in determining downs are commonplace. port accumulation. • Storage and — Many ports and shippers apply penalties for delays in cargo pick-up and container drop-off . As a result, quick cargo Cargo Dwell Time: Averages by Commodity Type turnover is incentivized. Petroleum (Tanks) Automobiles Trade Seasonality Liquid Bulk (Tank) Break Bulk Two of the most important metrics sought in the Project Cargo Cargo and Specie Disaster Scenarios transaction of cargo insurance are peak and average Dry Bulk exposure values. Underwriters want to understand Heavy Industry the average value at risk, but also seek clarifi cation on Petroleum (Products) worst-case accumulations of value in transit and at cov- General Specie The Tohoku Earthquake, Hurricane Sandy, and the Port of Tianjin explosions were all signifi cant ered locations. These numbers play a key role in pricing, Pharmaceuticals General Cargo losses to marine lines of business. All were very diff erent from one another: an earthquake and capital strategy, and accumulation management. Consumables tsunami in Tohoku; a hurricane in New York; and an industrial accident at Tianjin. But they all Electronics Exposure accumulates in diff erent ways for diff erent Temperature Controlled occurred in a short four-year period. This makes us wonder: What other types of cat losses ports and diff erent commodities. For example, retail Explosives cargo is busiest immediately before the holiday season, could befall the marine industry, soon and in the long run? Here we present three hypothetical 0 5 10 15 20 25 30 whereas petroleum and bulk commodities have more Days but plausible disaster scenarios involving signifi cant marine loss. constant trading patterns throughout the year. Under- standing seasonality is an important in estimat- ing port accumulations.

18 24,000 containers destroyed 4,000 cars burned Possible Scenario #1 46 fatalities Fire and Explosion at the Port of Singapore and severely damaged Port equipment damaged Four-month terminal shutdown

Low visibility due to smoke from The Shaheen was carrying 9,393,701 the cloud toward the container flammable in the vicinity was soon failures. But there was nothing fire liquefied gas had escaped from nearby Sumatra fires was an im- cubic feet (266,000 cubic meters) port 1,640 feet (500 meters) to burning, as the liquid gas continued crews could do to stop the flames the ruptured tank, and the fire had portant factor in the of liquefied (LNG) from the north. There were three small pouring out of the tank and the spreading through the Pasir Pan- burned out, the final toll included that occurred immediately to the Qatar. The prow of the Titan cut into lighters in the , on which vapor cloud continued to expand. jang container port, including onto almost 24,000 containers (both on east of Jurong Island, Singapore. the middle spherical tank on the several sailors died from a combi- Fire spread through the containers the thousands of new cars waiting the Titan and on the quayside), four The 1,100-foot-long Titan, arriving Shaheen and could not be extri- nation of suffocation and cryogenic stacked on the Titan. Onshore, the for transhipment at the neighboring ships (two moored by the side of from Shanghai, was laden with cated. The two vessels were locked burns due to the extreme cold of vapor cloud and fire spread hun- auto terminal. The landward fires the container port), and 4,000 cars more than 10,000 containers. The together, unable to maneuver. the vapor. For the first time ever, dreds of feet inland at the Pasir had to be left to burn. destroyed. The terminal was out of pilot was concentrating on avoiding there were slabs of ice floating in Panjang 2 Terminal. action for four months. Forty-six collision with an tanker heading Liquid gas from the ruptured tank the tropical sea. It was fortunate that the wind was people died. into the terminal when he failed to — at a temperature of -162°C — After about 30 minutes, two fire not from the east and the fire did see the radar image of the Shaheen, immediately started pouring into A spark caused the vapor cloud to ships were able to approach the not spread into the a Q-Max class tanker immediately the sea, boiling vigorously as it ignite somewhere along the shore- collision site from upwind and spray storage tanks and refineries on Ju- ahead. The Titan was moving at 7 spread over the warm water, turn- line, and it burned fiercely, all the water over the adjacent tanks on rong Island — the site of the largest knots when it sliced into the center ing into a sea-hugging vapor cloud. way back to the leaking vessel. The the Shaheen, successfully prevent- tank farm outside North America. of the Shaheen. A light wind from the south spread heat was so great that anything ing further LNG tank containment After two hours, when all the

20 21 83,000 fatalities Possible Scenario #2 Eight large container vessels destroyed, two sunk An Mw 9.2 Earthquake on the Luzon Arc 12,000 full containers destroyed Permanent damage to Kaohsiung Port with a 10-week total shutdown Subduction Zone Widespread shipping and global supply chain disruption

The foreshock occurred at 3:32 a.m. in southwestern Taiwan, where the reaching elevations of up to 50 The death toll in Tainan and Kaoh- collapsed, while stacked containers microelectronics and autos in with a magnitude of 7.6, at a depth fault rupture extended under the feet arrived. More than 30,000 siung, where the land was lifted up tumbled. Of the eight vessels in the China, the U.S., Germany, and of more than 18 miles, located 372 coastal cities of Tainan and Kaohsi- people in Dagupan were tallied as by several feet, exceeded 38,000. port at the time, four were dumped Japan. All the undamaged contain- miles west of the city of Bollinao on ung, with a combined population of either dead or missing. The tsunami Immediately after the quake, the on the neighboring quays by the ers at the port were stranded for up the west coast of northern Luzon 3.7 million people. swept the whole northwest coast main west-coast highways and tsunami, and the remaining four to three months as attempts were Island, Philippines. Twenty minutes of Luzon, causing intense damage railway line were blocked by col- were badly smashed against the made to clear the backlog. later, the much larger M9.2 earth- In northern Luzon, the worst- at other smaller fishing and resort lapsed and landslides. sides of the wharves. quake occurred nearby. The rupture affected city was Dagupan, built villages. There were more than The tsunami arrived 10 minutes The tsunami also travelled to the propagated to the north about 435 on former swampland, with a pop- 45,000 fatalities on Luzon Island. after the earthquake. The port was completely shut east along the southern coast of miles along the Luzon Arc subduc- ulation of 170,000. The buildings down for 10 weeks. A year after the China. The , tion zone interface, until terminat- in Dagupan were devastated by The impact was even worse in The combination of shaking, uplift, disaster, the port was still not fully mostly west facing, was well ing nearly six minutes later under widespread liquefaction, comp- Taiwan, whose coastal cities were and tsunami inundation was partic- functioning. The loss of Kaohsiung protected. However, the port and southwest Taiwan. arable to that seen in Christchurch located directly above the fault ularly devastating at Kaohsung Port created an enormous bottleneck for city of Macau was less fortunate, New Zealand in 2011. The city sank rupture. While taller Taiwanese — the largest in Taiwan. Large-scale many suppliers across Taiwan, who as the tsunami flooded two of its Strong, long-period shaking was felt by several feet as a result of tecton- buildings had been engineered, the liquefaction and lateral spreading were unable to export their goods, lowest-lying casinos and sunk throughout northern Luzon, but the ic subsidence. Twenty minutes after majority of the buildings below 10 affected much of the reclaimed and led to severe disruption to a several passenger ferries. highest intensities were experienced the shaking subsided, a tsunami stories were poorly constructed. land and quays. All container cranes range of global manufacturers in

22 23 12,000 full containers fl ooded 5,000 cars destroyed Possible Scenario #3 Six oil tanks overturned Houston-Area Hurricane and Storm Surge $450 million liability for clean up Three weeks port downtime $9 billion inland cargo loss

The Port of Houston’s terminals fl eets of Audis and Volkswagens But their actions were largely ineff - But the worst damage came from The port was out of commission for Inland losses were severe as well. were operating close to peak had recently been unloaded and ective against the 30-foot surge six tanks which, weakened by strong three weeks, during which time traf- The surge fl ooded hundreds of capacity. The two deep-water parked in the open storage lots at and nearly 150 mph peak gusts that gusts, were upended by the incom- fi c was diverted to dozens of other warehouses, and winds damaged container terminals were full as the Turning Basin. swept through the port. No termi- ing surge and spilled oil into Buff alo Gulf Coast ports in order to accom- thousands of cargo storage holiday season approached, and nal was left unharmed, and several Bayou, creating an oil slick that modate the large volume of petro- facilities, retail stores, and distri- special front-loaders were leased Port and terminal staff were busy were devastated. More than 5,000 extended for 5 miles. Two terminals leum. After port equipment was bution centers, resulting in cargo to stack cargo containers in stacks handling the near-record amount of new high-end cars were rendered had to close some of their berths to restored enough to re-operationalize losses over $9 billion, much of it higher than normal to accommo- shipping traffi c fl owing through total losses. Twelve thousand full accommodate the clean-up eff orts, all of the terminals, the port operat- concentrated in Galveston and date the increased shipping traffi c. the Galveston Bay when they containers were severely damaged, which lasted for eight months and ed at only 60 percent of its produc- Harris Counties in close proximity Due to high oil prices, the tank received the storm warning. They and several grain elevators and cost more than $450 million. tion capacity for the next year, until to the port. farms at the Jacintoport terminal had several days to initiate shut- their contents were compromised. full repairs could be made. were nearly full, and two large down and evacuation procedures.

24 25 Best Practices for Marine Cargo Catastrophe Modeling

A model can only be as good as its input data, and the quality of cargo data varies widely. Sometimes underwriting information is detailed, shipping routes are understood, and packag- ing measures are well documented. Other times, data is so sparse that even exposure values are unknown, and the coverage must be priced using proxy data such as company revenue or limits. Adding to these challenges, cargo is mobile (unlike buildings) and its value can change rapidly during the course of its transportation.

Given the pervasiveness of soft-market conditions, the improvement of cargo data may take a long time to achieve. But even with today’s data standards, there are catastrophe-modeling practices for marine lines that can increase its effectiveness. Perhaps most importantly, any modeling approach should be tailored to the underlying cargo coverage. The next two pages illustrate the most common types of coverage, and what RMS considers to be best modeling practices for each.

26 Case study: A large, vertically integrated food product manufacturer that makes bread and pastas

RMS Cargo Model : Recommended Exposure Classification Transit Coverage — The most difficult type of cargo finished goods at ports, warehouses, and coverage to model, transit policies cover cargo “in the retail stores. In this case, the final product (food) is due course of transit.” Fixed locations such as ware- worth significantly more than the raw materials (grains Raw Materials Storage houses and distribution centers are not contemplated. and other raw ingredients). Yet they carry the same

Product Category: Storage Specification: However, cargo can be delayed in customs and transit limits, deductibles, and exclusions all the way through Solid Bulk Silo hubs for weeks or months at a time, and the “inter- the supply chain. ruption of transit” wording in the accumulation policy Perils: Earthquake, Convective Storm clause ensures coverage for these situations. Thus, it Modeling stock throughput must not only consider the presents a significant accumulation risk and must be values at every location, but also the time spent, the closely monitored. processes involved, and the relative vulnerability of the storage. In this food-product manu- RMS’ port IEDs will also allow portfolio managers to facturing example, the insured stock would be coded as understand total industry exposure at key ports at both different products, with different storage options, as it In storage at production facility average and peak times. Applying a company’s market moved through the manufacturing process. share to these statistics will provide a useful frame of Product Category: Storage Specification: reference for port accumulations. Addressing data quality and availability issues are likely Consumable Warehouse the most challenging aspect of modeling stock through- Perils: Warehouse Coverage — As cargo insurance rates have put, as detailed risk information is required. Luckily, Hurricane fallen, many commercial policyholders have elected to the coverage is broad enough — and offers sufficient insure their contents under their cargo policy instead of cost savings to the policyholder — that obtaining the under their property policy. This is done by endorsing a information is feasible. Modeling the information is a transit policy to include warehouses with inventory. straightforward process that involves these steps: Underwriting guidelines for warehouse coverage usually Origin and Destination Ports require enough information so that modeling this cover- • Gather as much information as possible about the age is straightforward. Submissions include a schedule manufacturing process or supply chain, transporta- Product Category: Storage Specification Port: of locations. For each location, COPE (construction, tion routes used, and an estimate of time spent at Consumable Containerized or Warehouse occupancy, protection, exposure) information is avail- each point.

Perils: able, average/maximum values are provided, and limits • Code the exposure according to its location and Hurricane, Storm Surge are specified. product/storage attributes, to reflect the appro- priate vulnerability. RMS recommends coding each scheduled warehouse • Estimate exposure at each node of the supply chain location separately, with as much COPE information to most accurately reflect the risk. as is provided in the underwriting application. Using • Scale modeled loss according to time spent in each this information, the RMS cargo model can make the location. In the RMS model, this is done by means of Inventory Warehouse important distinction between products and storage the “dwell time” field. In other models, the Product Category: Storage Specification: configurations that are highly vulnerable to loss and RiskLink RDM may need adjustment to avoid dou- Consumable Warehouse at Destination those that are well protected. ble counting the loss when exposure is affected by the same event in two different locations (such as a Perils: Earthquake Stock Throughput Coverage — The broadest type of port and an inland warehouse in the same county). cargo coverage available, stock throughput is also some of the most important because its exposure values In many ways, the RMS marine cargo model was can be very large. Modeling it can be a challenging but purpose-built for stock throughput coverage. The vul- valuable exercise. “Stock” includes all contents, includ- nerability scheme accommodates all types of ocean and ing raw materials, work in progress, and finished goods inland storage points; the model can adjust exposure Retail Store across every location: from origin through manufacture, according to the time spent at each location; and port as well as on premises at final retail destinations. IEDs provide exposure data when none is readily avail- Product Category: Storage Specification: able through underwriting information. Modeling stock Consumable At Retail Destination Consider a large, vertically integrated food-product throughput exposure may provide insight into problem- Perils: manufacturer as an example. Its stock throughput atic locations in a supply chain, so that underwriting or Earthquake policy would cover its raw ingredients in storage; its loss mitigation efforts can be taken proactively. work in progress (WIP) at production facilities; and

28 29 critical for insurers. The RMS cargo model includes shape The Future of Marine files outlining the world’s biggest free ports and some of their exposure characteristics, to aid in accumulation Cargo Modeling analysis and geocoding.

Marine cargo insurance is over 600 years old. By Real-Time Vessel and contrast, cargo catastrophe modeling is a new Container Tracking

science that will mature as the maritime industry A single wristwatch shipped by any global courier with a evolves. RMS anticipates many modeling tracking number can be pinpointed to an exact location in real time. Yet the exact location of a $500,000 container full advancements to occur over the next several of wristwatches being shipped to a major retailer is unknown years, and has an active research agenda to for most of its journey. The cargo industry has been slow to adopt new , but many promising signs are on explore new opportunities accordingly. The the horizon. First, global cargo ships are now tracked in real following is a summary of a few areas on RMS’ time by a number of services, enabling instant observations of the vessel, its size, and its destination. Second, radio research agenda that carry promising potential. frequency ID (RFID) chips are in many cargo containers today, but they are used for inventory and terminal purposes, not for tracking. Finally, ports are becoming increasingly automated, to the point where even Cargo Accumulation operation is frequently performed by computer. Beyond Ports If the data from these advancements can be leveraged, many modeling advancements would be possible, and the maritime The Tianjin port explosions highlighted the accumulation of and insurance industries could benefit substantially. exposure in large ports. But beyond ports, there are hundreds of locations across the world with high concentrations of marine cargo. These include auto storage facilities, bonded warehouses, art-storage facilities, museums, and recently, Port Disruption free ports. Modeling

Free ports remain a concern to insurers as they store an The world’s $10 trillion of annual seaborne trade depends on increasing amount of high-value artwork. From 2000 to adequate terminal capacity and efficient cargo handling to 2014, global art sales more than tripled to $66 billion. Free succeed. Port shutdowns, slow-downs, and interruptions can ports are enticing storage repositories because they offer carry consequences that affect virtually every participant in tax advantages and high-end amenities. The Luxembourg the global economy. Therefore, their impact — and prob- free port markets itself as the “best alternative to owning ability — should be further studied. your own museum,” and staggering amounts of value have accumulated in its vaults. RMS is a leader in modeling networks, supply chains, and contingent business interruption scenarios, and we view port Free ports are notoriously secretive and little exposure interconnectivity as another important topic in this area of information about them is available. The Economist study. Quantifying and managing all sources of catastrophe estimated $100 billion of art exposure in the main building risk facing the global maritime industry — from hurricane and of Geneva’s free port, generally considered the world’s earthquake to cyber and terrorist attack — will enable more leading art storage facility. Given the scale of this exposure resilient risk-management strategies, more efficient capital concentration, actively monitoring and managing it is usage, and more effective underwriting.

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