Transcript Parametric Re Concentric Ltd.

Designing Parametric Risk Contracts
Using Catastrophe Risk Models
Dennis E. Kuzak
Sr.Vice President, EQECAT, Inc.
Agenda
• Introduction to Parametric “Insurance Contracts”
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–
–
–
Description
Advantages and disadvantages
Parametric Triggers and Parametric Index Triggers
Example-Australis Ltd.
• Reporting Agencies for Caribbean Contracts
• Hypothetical Country Contract
– Country Map
– Designing a parametric index
– Post –event determination of loss
2
Parametric “Insurance” Contracts
• Financial contracts vs. traditional indemnity
insurance
• Physical measurement of the loss parameter
• Highly correlated with expected physical damage
(e.g. peak gust wind speed)
• Subject to probabilistic analysis
• Sufficient historical data to construct statistical or
simulation based risk model
• Independent recording of event parameter
3
Parametric Triggers
Advantages
–
–
–
–
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Simplicity
No Disclosure/Exposure Data.
Transparency
Moral Hazard
Rapid Settlement
Disadvantages
– Basis Risk
– Regulatory
4
Parametric Triggers
• “Quake in a box” – Tokyo Marine-1997 and Concentric Ltd (Tokyo
Disneyland) 1999
• Payoff based on earthquake magnitude > Magnitude JMA occurring within
a region defined by boxes or circles
• Simple to understand
• Rapid settlement- 30 to 60 days max.
• Considerable basis risk- poor correlation between loss and loss recovery
Parametric Re
Concentric Ltd.
5
Parametric Index Triggers
• Why were they created?
– Existing parametric triggers have unacceptable basis risk
• How do they reduce basis risk?
– Select physical parameter highly correlated with
damage/loss
– Multiple measurement (grids) locations in close proximity
to risks
– Use weighting factor at each location to recognize
vulnerability and value distribution
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Example- Australis Ltd (2006)
• Securitization of Australian Cyclone (hurricane) and
Earthquake Risk for Swiss Re
• Parametric index for cyclone and earthquake risk
• Cyclone risk for NE Australia and earthquake risk for entire
country
• Cyclone risk uses peak gust wind speed, earthquake uses
intensity scale (0-12)
• Earthquake reporting agency: Geosciences Australia
• Cyclone reporting agency: Joint Typhoon Warning center
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Australian Earthquake Calculation
Locations
Northern Territory
Queensland
Western Australia
Brisbane
11%
South Australia
New South Wales
Perth
7%
Sydney / Newcastle
27%
Remainder
of Australia
32%
Adelaide
6%
Victoria
Australian
Capital Territory
Melbourne
17%
Tasmania
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Weight Distribution of Cyclone
Calculation Locations
Cairns 4%
Northern Territory
Townsville 4%
Queensland
Mackay 2%
Gladstone 3%
Western Australia
Maryborough &
Bundaberg 5%
Brisbane 68%
South Australia
New South Wales
Victoria
Tasmania
Australian
Capital Territory
Remainder
of Locations
14%
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Hurricane Reporting Agency
• The National Hurricane Center (NHC) is a branch of the Tropical
Prediction Center (TPC), under the National Oceanic and Atmospheric
Administration (NOAA). NHC maintains a continuous watch on tropical
cyclones over the Atlantic, Caribbean, Gulf of Mexico, and the Eastern
Pacific from May 15 through November 30. The Center prepares and
distributes hurricane watches and warnings for the general public, and
also prepares and distributes marine and military advisories for other
users.
• The NHC's Preliminary Reports contain comprehensive information on
each storm, including synoptic history, meteorological statistics,
casualties and damages, and the post-analysis best track (six hourly
positions and intensities).
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NHC Best Track Report
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Earthquake Reporting Agency
• National Earthquake Information Center (“NEIC”) created in
1966 as part of US Geological Survey
• Rapidly determines location and magnitude of significant
earthquakes in US and worldwide
• Collects data through operation of national and global
seismograph network of over 3000 stations
• Reports locations and magnitude via:
– http://www.neic.cr.usgs.gov/neis/bulletin/bulletin.html
– Quick Determination of Epicenters (QED) - daily
– Preliminary Determination of Epicenters (PDE)
• Weekly and monthly
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Hypothetical Country Contract
* 3 Tourism
*1
*2
Port and manufacturing
Capital
* 4 Tourism
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Creating a Parametric Index
1.
2.
3.
4.
5.
6.
Compile physical and financial data for the country
Aggregate exposures at each calculation location
Using hurricane model, calculate physical damage loss
exceedance (LEC) curve
Estimate catastrophe funding deficit from reduced taxes
and emergency response efforts as a % of physical
damage.
Calculate funding deficit loss exceedance curve
Create parametric wind index ( based on gust wind speed)
which is “equivalent” to the funding deficit LEC
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Probability
Creating a Parametric Index
12%
10%
8%
Damage LEC
6%
4%
2%
Loss ($ Billions)
0%
0 .2 .4 .6 .8 1.0 1.2 1.4 1.6 1.8 2.0 2.2
Probability
12%
Catastrophe Deficit LEC
10%
8%
Wind Index LEC
6%
4%
Contract Amount: $40 xs $40 M
2%
Loss ($ MiIlions)
Wind Index
0%
Index Layer: Attach 2000
0 20
60
1000 3000
100
140
5000
7000
180
220
Index Layer: Exhaust 4000
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Post Event Loss Determination
• Obtain Hurricane parameters from the National
Hurricane Center
• Calculate wind speed at each of the four locations
• Calculate wind index at each location
• Sum the four values to calculate event index
• Loss recovery = ((Event Index- attachment)/Layer)
* contract amount
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Hurricane path and calculated
wind speeds
* 3 Tourism
(95 MPH)
*1
Port and manufacturing ( 125 MPH)
*2
Capital
(130 MPH)
*4
Tourism
( 145 MPH)
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Wind Index
i=4
= 0.00005502  i wi  (vi – 30)4
i=1
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Index Calculation and Loss
Payment
Calculation
Location
1
2
3
4
Weight
0.3
0.2
0.4
0.1
Event Gust
Windspeed
125
130
95
145
V-30
(v-30 )^4
95
100
65
115
81450625
100000000
17850625
174900625
Sum
x
Event Index
Event Loss
(3,800-2000)/(4,000-2,000)
Contract Amount
Payment
X Weight
24,435,188
20,000,000
7,140,250
17,490,063
69,065,500
0.00005502
3,800
=0.9
$40 million
$36 Million
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