CATASTROPHE MODELS AND THE PERIL OF SEVERE CONVECTIVE STORMS LeeAnn Tomko, SVP, CCRMP, Catastrophe Risk Analyst & Jeffrey Schmidt, Assistant Vice President
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WHAT ARE CATASTROPHE MODELS?
What A tool that quantifies risk
How Examines insured values that are exposed to catastrophic perils such as hurricanes, earthquakes, terrorism, severe convective storms, winterstorms, flood and wildfire
Why Aids management decision making on: • Pricing and underwriting • Reinsurance buying • Rating agencies • Portfolio management
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2021 NAMIC Derecho and Severe Weather Virtual Summit - Schmidt & Tomko Page 1 of 12 WHY USE CATASTROPHE SIMULATION MODELS?
Cat Modeling • Simulates thousands of years, historical experience may not reflect catastrophe loss potential • Captures and reflects scientific, engineering and insurance expertise • Contemplates individual risk characteristics = company-specific rather than industry-based • Aids in underwriting • Allows hypothetical portfolio analysis and evaluation • Provides a common “language” spoken by insurers and reinsurers • Technology advancements continually enhance processing of large data sets with complex calculations • More model vendor options have become available, for multi model views
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TYPES OF MODELS
Deterministic Model Exceedance Return Period Occurrence Loss Aggregate Loss • Modeling using a single discrete event Probability (Years) (000) - OEP (000) - OEP • The event is assumed to happen without regard to probability 0.1% 1,000 $90,000 $300,000 • Commonly seen as recreations of historic events or single hypothetical analysis 0.2% 500 $70,000 $250,000
Probabilistic Model 0.4% 250 $60,000 $200,000 • Uses a series of simulated events and accounts for the probability of those events over time 1.0% 100 $40,000 $160,000 • Produces an exhaustive range of loss scenarios • Fills in holes with geographical distributions of events 2.0% 50 $35,000 $105,000 • Attempts to properly address low frequency but high severity events 5.0% 20 $25,000 $75,000 • Provide for robustness in the tail – compensate for little historical data Average Annual Loss $55,000
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2021 NAMIC Derecho and Severe Weather Virtual Summit - Schmidt & Tomko Page 2 of 12 THE THREE CATASTROPHE MODEL COMPONENTS
1 2 3
Hazard Module Vulnerability Module Financial Module Site Intensity Damageability of Property Loss Calculation
• Generates the pattern of physical • A set of relationships that defines how • Evaluates insured loss given disturbance from an event (HU, EQ, structural damage varies with exposure to structural values as well as the tornado/hail, etc.) differing levels of hazard (such as ground applicable insurance and motion or wind speed) reinsurance structures • Important elements: geocoding, distance to coast • Important elements: value of risk, • Important elements: limit, construction, occupancy, year built, number deductible, reinsurance information • Stochastic event database of stories
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SCS MODELING – HAZARD MODULE
• Identify historical areas where SCS enabling conditions were in place (moisture, instability, wind shear), using reanalysis datasets. Re-create these. Moisture • Use statistical methods to generate specific footprints of tornado, hail and non-tornadic wind gusts within enabled areas, to populate the stochastic event sets. The result is a set of physically plausible but unobserved events of varying site intensities. Statistical Instability Methods • Validation can only be executed at a coarse level due to limited data availability, especially for hail and non-tornadic wind. The databases are updated following extensive quality control and consolidation from local offices.
Wind Shear
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2021 NAMIC Derecho and Severe Weather Virtual Summit - Schmidt & Tomko Page 3 of 12 SCS MODELING – VULNERABILITY MODULE
• Apply damage functions appropriate to the construction and occupancy type at hand, according to the sub perils each of hail, tornado and straight-line wind • Damage functions informed by the available engineering literature, codes and standards, and claims available data • These damage functions shift according to number of stories, construction type and year built • Tornado and straight-line wind have different damage characteristics. Tornadoes impose torsional and suction loads, where as straight- line wind gusts act more like hurricane gusts. Hail damage is impact-related.
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SCS MODELING – KEY FACTORS IN VULNERABILITY
Occupancy Class More Vulnerable More Impact Primary Building Characteristics Agricultural Facilities Occupancy Commercial Facilities Construction Class Industrial Facilities Gas Stations Year of Construction
Residential Number of Stories Restaurants/Retail Floor Area Temporary Lodging (Hotels) Religion Office Buildings General Industrial Schools Parking Structures
Less Vulnerable Less Impact
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2021 NAMIC Derecho and Severe Weather Virtual Summit - Schmidt & Tomko Page 4 of 12 MODELING CHALLENGES – DIFFERENCES IN DAMAGEABILITY LOW PROBABILITY, HIGH CONSEQUENCE
• Tornadoes – small, rare events ~ 1 in 1-Billion / sq ft / year (Oklahoma) ~ 1 in 1,200 / sq mile / year (Oklahoma) – VERY high consequence events – Significant tornadoes drive tails, as well as widespread outbreaks • Hail – death by a thousand stones? – Models don’t capture high levels of small events well, the “kitty cat” issue
– Hail (and weak tornadoes and wind) can cause low-grade damage that can still be financially Joplin damage swath (NWS/NOAA) significant in aggregate • Straight-line winds – varied in their form – Include downbursts, outflow, microbursts, and derechos – Derechos are infrequent, extreme cases – Very low frequency events, not well represented in models – By definition impacts a large footprint
SCS Modeling Has Great Uncertainty Greater uncertainty and a different approach with different physical drivers and meaning NWS: largest hailstone on record in the US compared to hurricane and earthquake modeling (Vivian, SD on July 23, 2010) Measured 8.0 inches in diameter and almost 2 pounds
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DIFFERENT APPROACHES TO SCS MODELING VARIABLE RESOLUTION GRID VS. FOOTPRINT
Variable Resolution Grid Approach VRG allows for finer level of hazard in populated regions (up to 300x300 feet) versus grids than can expand to 35x35 miles in sparsely populated regions; grid system requires hazard to be spread evenly across a grid cell
Footprint Based Approach Footprint approach technically superior approach to simulate true “in-or-out” nature of a severe thunderstorm; however, computational power needed to gain convergence is a shortcoming
Difficult balance with SCS modeling: stochastic track density and smooth hazard representation …versus practical run time…
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2021 NAMIC Derecho and Severe Weather Virtual Summit - Schmidt & Tomko Page 5 of 12 MODELING LIMITATIONS
• Incompleteness and biases in the historical data • Limitations in computing power for appropriate simulations • Frequency not captured well • Tail risk not adequately accounted for (blind spots and limited event sets) • Difficult to produce post-event footprints – only a few historical events included in vendor catalogs
• There have been no updates to the most commonly used models for over 6 years • Expensive and time-consuming to develop and operate
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CATASTROPHE MODELING SUMMARY
Model output is heavily influenced by three critical areas:
1 2 3
Quality of the Source Data Model Methodology Model Application
• Availability • Difficult to quantify • Added complexity in decision process • Completeness / accuracy • Different amongst vendors • Over-reliance on a specific number/return period
Other data sources are available to help manage this kind of risk
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2021 NAMIC Derecho and Severe Weather Virtual Summit - Schmidt & Tomko Page 6 of 12 SEVERESEVERE THUNDERSTORMTHUNDERSTORM RISKRISK MMAGNITUDEAGNITUDE INDEX Jeff Schmidt, AVP & Meteorologist
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MOTIVATION BEHIND THE STORM INDEX
Catastrophe models have Leveraging additional Numerous weather and Transparency in strengths techniques to assess severe climate datasets exist to the risk score approach and limitations thunderstorm risk can help help analyze thunderstorm adds clarity given the a company own their view activity uncertainties around the of risk highly localized nature of thunderstorms
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2021 NAMIC Derecho and Severe Weather Virtual Summit - Schmidt & Tomko Page 7 of 12 WHY TAKE A RISK SCORE APPROACH?
• Hazard: Isolate the observed weather patterns • Resolution: Map the risk to an easily understandable and granular resolution • Scoring: Allow for baseline comparisons from one region to another Hazard-only County-wide metric resolution
Relativity- based scoring
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SCS THROUGH HISTORY
Trained spotter networks reach consistent Official tornado, hail and wind coverage, WSR-88D installation complete, Radar network is updated to records begin Doppler radar network radar signature estimates implemented dual-polarization; latest deployment beings catastrophe models released
Early Late Early 1950s 1970s 1990s 1996 1990s 2007 2010s
Fujita scale Enhanced Fujita introduced and Scale implemented on Twister debuts, implemented an operational grossing $495M basis worldwide
Image sources: NWS, The Weather Channel, Accuweather, tenor.com, Wiki Images
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2021 NAMIC Derecho and Severe Weather Virtual Summit - Schmidt & Tomko Page 8 of 12 DIGGING INTO THE DATA
PROS CONS
Free Reliable Abundant Population bias Timing Quality control
Image sources: NWS
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HOW WAS THE STORM INDEX CREATED?
Frequency & Severity
Current Geographic Hail Academic Information Tornado Literature
Straight- Cleaned Data SToRM Applied Data line Wind Inputs Index Analytics
Wind Tornado Hail Index Index Index
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2021 NAMIC Derecho and Severe Weather Virtual Summit - Schmidt & Tomko Page 9 of 12 APPLYING THE STORM INDEX: PREDICTIVE MODELING
Predictive modeling case study: 3. SToRM 1. Roof Age 2. Year Built • Conducted on Florida homeowners carrier struggling with SCS 1 2 Index3 • 50 variables introduced into model • 18 with provided predictive value 4. Hail Index4 5 6
9. Tornado 7 8 Index9
10 11 12
14. Wind 13 Index14 15
16 17 18
Image sources: HGTV, This Old House, Guy Carpenter
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APPLYING THE STORM INDEX: RISK TOLERANCE
Company ABC Severe Thunderstorm User
10,000
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2021 NAMIC Derecho and Severe Weather Virtual Summit - Schmidt & Tomko Page 10 of 12 APPLYING THE STORM INDEX: GROWTH
Values concealed
Index 1 Index 2 Index 3 Index 4
Values Concealed
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CONCLUSION
What Quantifies the relative severe thunderstorm risk by county for the U.S.
Includes representation of the frequency and severity of the three sub-perils (hail, tornado, and damaging straight line wind)
How Comprised of multiple publically available data sources for appropriate time frames
Leverage a number of analytical techniques to aggregate and convey the data
Why Acts as supplement to balance catastrophe model output
Supports carriers in multiple business initiatives in order to more fully own their view of risk for severe thunderstorm
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2021 NAMIC Derecho and Severe Weather Virtual Summit - Schmidt & Tomko Page 11 of 12 THANK YOU
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DISCLAIMER
Guy Carpenter & Company, LLC provides this report for general information only. The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy, and it should be understood to be general insurance/reinsurance information only. Guy Carpenter & Company, LLC makes no representations or warranties, express or implied. The information is not intended to be taken as advicewith respect to any individual situation and cannot be relied upon as such. Please consult your insurance/reinsurance advisors with respect to individual coverage issues. Statements concerning tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as reinsurance brokers and risk consultants, and may not be relied upon as tax, accounting, legal or regulatory advice, which we are not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas. Readers are cautioned not to place undue reliance on any historical, current or forward-looking statements. Guy Carpenter & Company, LLC undertakes no obligation to update or revise publicly any historical, current or forward-looking statements, whether as a result of new information, research, future events or otherwise. This document or any portion of the information it contains may not be copied or reproduced in any form without the permission of Guy Carpenter & Company, LLC, except that clients of Guy Carpenter & Company, LLC need not obtain such permission when using this report for their internal purposes. The trademarks and service marks contained herein are the property of their respective owners.
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