In Focus: Taming Cats-Managing Natural and Man-Made Catastrophe Risks

Baltimore, Maryland
October 4-5, 2012

Concurrent Sessions

Natural Cats
Man-Made Cats
Enterprise Risk Management and Cats
Modeling and Cats
Professional Standards

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Natural Cats

Earthquakes: Modeling and Management of the Shake, Rattle and Roll

With major recent earthquakes in Japan, New Zealand, and Chile, managing earthquake risk has become more of a concern for US insurers. Despite the low take up rates, there are potential U.S. earthquakes that could cause in excess of $100 billion dollars in insured losses. This session will focus on current best practices in managing earthquake risk, including a review of catastrophe models and mapping tools.

Moderators:
Klayton Southwood, Senior Consultant, Towers Watson
Panelists:
David Langdon, Executive Vice President, Towers Watson
John McIlwaine, Assistant Vice President, AIR Worldwide

News Flash — The President Signs Flood Insurance Reform and Modernization — What The New Laws May Mean To You

On July 6th the president signed H.R.4348, a bill including Flood Insurance Reform and Modernization, into law. The new law makes changes the National Flood Insurance Program: eliminating most long standing subsidies, establishing a reserve fund, and studying reinsurance and privatization. Come hear how FEMA's National Flood Insurance Program (NFIP) actuaries are responding to legislation and discuss what it might mean for you.

Moderator/Panelist:
Thomas Hayes, Federal Insurance Administration, FEMA
Panelists:
Andy Neal, Actuary, National Flood Insurance Program, FEMA

Current Issues in Crop Insurance

The crop insurance program has undergone significant changes in recent years. The session will review changes introduced by the 2008 Farm Bill, the renegotiation of the Standard Reinsurance Agreement that became effective in 2011, and the outlook for the 2012 Farm Bill. The discussion will also touch on the impact of recent rate activity and the introduction of the Combo policy on program experience.

Moderators:
Klayton Southwood, Senior Consultant, Towers Watso
Panelists:
Frederic Schnapp, Senior Vice President, National Crop Insurance Services
Thomas Zacharias, President, National Crop Insurance Services

Agricultural Insurance In the Caribbean

The Caribbean geographical region is subject to various natural catastrophes. The impact on agriculture presents challenges for agricultural insurance structures, particularly in respect of ratemaking and reserving in catastrophe years. Approaches vary from country to country, and regional initiatives have had limited success. The session sets forth the issues from a risk perspective and presents a unified general approach to ratemaking and reserving.

Speaker:
Michael Bayard Smith, Consultant

Modern Hurricane Ratemaking: Pricing at the Location Level

Although the use of catastrophe models has been widely adopted in the industry, the literature contains relatively little on how to use catastrophe model output to construct a rating plan. In practice, the pricing of this peril is often based on Average Annual Loss by territory, with territorial definitions that do not adequately differentiate risk. Class factors may be determined without consideration of correlation among them or between class factors and territory. This session will consider a more sophisticated method by describing in detail an approach to constructing a pricing structure by performing a multivariate analysis using cat model output combined with Geographic Information Systems (GIS) data. It will include discussion of how to construct territories appropriate for the hurricane peril, how to construct base rates and class factors, and the limitations of this approach.

Moderators:
Matthew Chamberlain, Milliman, Inc.
Panelist:
Kent David, Vice President, Consutling Services, Eqecat

Man-Made Cats

Measuring Cat Exposure in the Energy Space

Cats in the energy space are often high-profile events engendering a lot of press, especially when there is damage extending beyond first party coverages to liability coverages and loss of life. This panel of experts will start with an exploration of modeling offshore exposures, including strengths and weaknesses of current models, delivered by the head of cat modeling for a reinsurance firm now recognized for its depth of research. In the onshore space, we are only just starting to come to terms with exposures from transmission and distribution of energy, so recognition of accumulations and scope of loss across multiple insurance coverages, in light of the San Bruno gas line explosion that leveled a California neighborhood, becomes a challenging measurement exercise. Finally, while property exposures are often the focus of attention, emerging liability issues should be an area of deep concern also. We will look at emerging liability issues through one of the latest high-profile areas of concern &mdash hydrofracking &mdash and explore those issues with Munich Re America's foremost casualty referral underwriter.

Moderators:
Jonathan Hayes, Managing Director, Guy Carpenter & Co. LLC
Panelists:
Joshua Hillman, Head of Cat Modeling, Validus Group
Christopher Ramarui, Senior Vice President, Guy Carpenter & Co, LLC

Is That a Worm or a Bot? Cyber Liability Insurance

Cyber Liability and Network Security insurance are new coverage concepts that are evolving at an amazing pace every day. There are lots of questions surrounding these concepts such as: What are the risks and how do you insure them? What is the coverage and what types of businesses need to have this coverage? What does this mean for your company, be it a primary insurer, a reinsurer, a broker, or a consultant? And, most importantly, what does it mean to your clients?

Our speaker will present on current trends for this line of business as well as the pain points of the marketplace as they answer these and other important questions. The speaker is knowledgeable in this fast growing coverage. He will share his experience from the point of view of a primary insurer and reinsurance company.

Speaker:
John Merchant, Director, Cyber Liability, Freedom Specialty Insurance Company

Modeling Casualty Cats/Clash Pricing

Similar to increasingly sophisticated property models, models are available to help casualty business writers exposed to mass torts evaluate and understand their risks. These models are especially timely for insurers bound by Solvency II, who will be required to explicitly estimate the potential impact of casualty catastrophes. Many casualty insurers are already aware that understanding their potential exposures to mass torts is critical for continued financial integrity and an important consideration within a sophisticated enterprise risk management framework. This session will examine the challenges insurers face when trying to model casualty catastrophes and describe approaches used to model these risks as reinsurers try to evaluate the risks and utilize reinsurance through clash coverages to address some of the exposures.

Speakers:
Matthew Ball, Director, Towers Watson
Landon Sullivan, Senior Actuarial Analyst, Risk Consulting and Software/P-C Insurance Practice, Towers Watson
Christopher Najim, VP & Senior Actuary, Swiss Reinsurance America Corporation

Disasters in the Financial Space

TBD

Speakers:
Vagif Amstislavskiy, Actuarial Director/Vice President, Zurich N.A.
Jason Israel, Managing Director, Guy Carpenter & Company

Man-Made Unintended Consequences

This session will focus on the drivers and unintended consequences of the involvement of legislators and regulators in the details of insurance risk management using Florida as an example, examining the lessons learned while anticipating the next event.

Moderator:
Klayton Southwood, Senior Consultant, Towers Watson
Panelists:
Yong Gilroy, Chief Insurance Officer, Citizens Property Insurance Corporation
Judith Durdan, Consultant, Durdan Consulting

Enterprise Risk Management and Cats

Current Developments in the Cat Bond/ ILS Space

Activity has picked up this year, with new classes of issuance, new sponsors, new sources of capital, and new ways this capital is investing in the space. What is all this activity, why is it happening now and what does it mean for the reinsurance industry? This panel will have a brief introduction to the ILS space, defining size, class of product, differences from reinsurance, and value proposition, followed by more in-depth discussion of current developments and a look forward to the balance of 2012 and beyond. The panel will have representation from key ILS market participants including a multiple time repeat issuer, a leading and longstanding dedicated ILS manager and one of the leading broker/dealers in the space. Panelists will address the value proposition from all perspectives, as well as address more detailed topics including views about model adequacy given recent events, loss cost analysis, pricing of individual deals, as well as what constitutes portfolio optimization. Additionally, discussion will touch on what makes this specialized space attractive to an issuer as well as why the ILS space is different from standard reinsurance and how these differences are important when considering ILS protection relative to other risk transfer alternatives.

Moderator:
Jonathan Hayes, Managing Director, Guy Carpenter & Co. LLC
Panelists:
Daniel Hogan, Jr., VP, Risk Management, The Hartford
Ryan Clarke, Vice President, Guy Carpenter & Co, LLC
John Seo, Co-Founder & Managing Principal, Fermat Capital

Incorporating Cat Model Data into Economic Capital Models

CAT Portfolio Optimization and Capital Allocation

In this session we will discuss practical considerations of catastrophe insurance portfolio optimization and capital allocation. We will discuss the sources of uncertainties and how to navigate the risk associated with CAT uncertainties in portfolio optimization and capital allocation. We will present a portfolio optimization method using multiple metrics, namely, (i) the portfolio diversification/concentration metric, (ii) the risk/return metric of individual contracts, and (iii) the cost/benefit of hedging (retrocession).

Speakers:
Shaun Wang, Chairman, Risk Lighthouse
Ming Li, Tokio Marine Technologies

Cats at the NAIC

This session will discuss current efforts to include a catastrophe risk charge into the P&C risk-based capital formula, and the regulatory process for reviewing hurricane models and the use of those models in rate filings.

Moderator/Panelist:
Alan Seeley, Chief Actuary, New Mexico Department of Insurance
Panelist:
Robert Lee, Actuary, Florida Office of Insurance Regulation, Tallahassee, FL

Managing Cat Risk: It's All about the Portfolio

Traditional actuarial techniques, as well as standard casualty actuarial training and education, rely heavily on the law of large numbers. As such, many pricing actuaries focus on expected losses and expenses of a book of business and expect volatility to decrease as the volume of business increases. Catastrophe risk, on the other hand, is a low frequency - high severity risk, and as such the risk is an increasing function of business volume - the more business is written, the higher the probability of capital impairment. Unlike the standard insurance risk, mis-pricing of catastrophe risk in and of itself doesn't really cause any problems - unless the mis-pricing leads to a suboptimal portfolio via underestimating the exposure and accumulating more risk than desired or overestimating the loss potential and turning away profitable business. There will never be enough premium to cover the actual losses from a catastrophic event (or any low frequency - high severity event). Premium for catastrophic event coverage is meant to provide an appropriate return on the capital supporting the cover and to pay for any reinsurance or retrocessional purchases.

This session will discuss the interactions between pricing and portfolio management, and touch upon some ERM related issues related to catastrophe risk.

Moderator/Panelist:
Thomas Le, Director, PricewaterhouseCoopers
Panelist:
Kevin Madigan, Actuarial & Insurance Management Solutions, PricewaterhouseCoopers LLP

Modeling and Cats

The Next Phase in Catastrophe Models and Modeling

Since its inception in the late 1980s, catastrophe modeling has certainly advanced. New peril models have been introduced and existing models have undergone many revisions. The software platforms have seen significant improvements over time, and companies have come to rely on them in their catastrophe risk management to establish capital and reinsurance needs. The models form the basis for pricing virtually all large reinsurance and capital markets transactions with material catastrophe exposure. In primary insurance ratemaking, they have replaced the previously used experience-based methodologies. They are even used to establish reserve requirements following major events. In short, the industry has come to rely heavily on these models.

However, models have to large degree been treated as the domain of the modeling vendors with a limited understanding of their strengths and weaknesses by many users. The users' implicit assumption has been that the underlying science is beyond most actuaries' and cat modelers' area of expertise, as the underlying science stems from many years of research by PhDs in fields far removed from the area of insurance. Consequently, model users often simply accept the model output as the best estimate of their risk, which has typically been expressed by EP curves. The availability of this risk measure has simplified the process of executing large catastrophe risk transfer transactions and served as a basis for regulatory and rating agency catastrophe risk assessments. As a consequence, the industry is very sensitive to any material change in the catastrophe risk quantification of these models.

The aim of this session is to:

• Put the model building and validation process in perspective and provide insight into sources and variations in uncertainties between model components and regions
• Identify and discuss the implications of ongoing uncertainty for the industry and the regulators in terms of model usage and reliance on model output
• Given that the understanding of catastrophe risk will continue to improve, and yet unknowns remain, explore how the model vendors could approach the development and release of new findings and research to help the market adapt more easily to new views of risk, while continuing to recognize model uncertainty
• Discuss needed improvements in the software platform features and functionality to enable users to develop deeper insights into their risk, and develop their own view of risk alongside the risk characterized by the models

Moderator:
Anders Ericson, VP, Model Product Management, RMS
Panelist:
Robert Muir-Wood, Chief Research Officer, RMS

Cat Models: Questions You Should Ask List this even though we don't have speakers

Should I rely on a catastrophe model?

To answer this basic question, we will provide information to help attendees understand:

• In which circumstances is use of the model preferable to relying on statistical inference based on historical exposures and losses
• What is the model designed to cover and, importantly, what it is not designed to cover
• For what types of problems does the model provide useful information and, importantly, for which situations is the model not well suited
• How to deal with the uncertainty inherent in the model
• How to judge whether a catastrophe model is reliable
• How to look at a model's performance in relation to an actual event

Managing Severe Thunderstorms

TBD

Evaluation of Flood Modeling: Is the U.S. Ready?

TBD

Tornado/Hail: To Model or Not to Model?

2011 brought on much unprecedented catastrophic activity and yet another confirmation of the difficulties in estimating Tornado/Hail (or Severe Convective Storm -SCS) exposure. Industry experts will discuss the strength and limitations of CAT models in the evaluation of SCS and offer practical solutions on addressing these limitations in reinsurance contract pricing.

Speakers:
Halina Smosna, Endurance Specialty Insurance Ltd.
George Davis, Vice President, AIR Worldwide

Professional Standards

Professionalism Session