The Management of Losses Arising From Extreme Events

This paper explores extreme events and their impact on the insurance market. There are 5 basic sections: The first of these relates to a description of the types of events that we need to consider. The appendices give fuller details and data relating to the risks. These form an historic perceptive of the issues. This is followed by an explanation of Extreme Value Theory. Accompanying this paper is an Excel spreadsheet with worked examples. The next section deals with the various cat models that are used in the market. At the end of this section we consider the differences between the bottom up approach from cat modeling and compare with EVT as a top down approach. Finally we deal with the management of extreme events and look at realistic disaster scenarios and consider risk measures. We conclude with a section that brings all these issues together. If the world’s to globalise then the final conclusion is that the growth of mega cities and mega risks combined with a limited number of ultimate risk takers will mean that there is insufficient world wide insurance capacity to deal with many of the realistic loss scenarios, and that matters will not improve as the process continues. The main alternative is to rely on the wealth of the financial sector to absorb these losses which are minimal compared with daily fluctuations in asset values.