Challenges in
Environmental Risk
Management
Insurance
Dr Michael Maran
Chief Science Officer
Catlin Group Limited
Catlin Group Limited
1
outline
• The emerging environmental challenges in the insurance sector:
•
the needs of the insurance industry
•
where there are gaps
•
new services or products that might help to address these needs
Catlin Group Limited
2
back to basics
Duty to Policyholders
Fair Price
Terms & Conditions
Duty to Shareholders
Catlin Group Limited
3
the needs of the insurance industry
Duty to Policyholders
Fair Price
Terms & Conditions
Duty to Shareholders
“Fair Price”  Equitable  Price reflects Risk
Risk = f (Hazard, Exposure, Vulnerability)
Hazard = f (Frequency, Severity, [duration etc])
Catlin Group Limited
4
low
severity
high
Frequency / Severity
high
Catlin Group Limited
frequency
5
low
precision v accuracy
True
value
True
value
True
value
Catlin Group Limited
6
the gaps
• data
• understanding the uncertainties
• timescales
• rare extreme events
• event dependency and correlation
Catlin Group Limited
7
data
• relevant
• accurate
• verifiable
• usable
• volume
Catlin Group Limited
8
understand the uncertainties

know the rules

be wary of unknown factors

use but do not rely on the past
Catlin Group Limited
9
timescales
Days
Loss Mitigation
Weeks
Months
Policy Formulation
Years
Business Planning
Decades
Catlin Group Limited
10
rare extreme events
Catlin Group Limited
11
Event dependency and correlation
• Insured events are generally considered as independent events
• In most cases this is probably true – or is it?
• Do we recognise when they are not independent?
• How do we identify and measure dependency?
– Earthquakes: When do quakes stop being defined as aftershocks?
– What about weather?
• How do we view independent but correlated events?
– e.g. US Hurricanes and Australia drought
Catlin Group Limited
12
Threat correlation
University of Cambridge
Judge Business School
Centre for Risk Studies
http://risk.jbs.cam.ac.uk/
Catlin Group Limited
13
new products and services
• How good is the data?
– Is it raw / cleaned ; accurate ; verified ; up to date?
• Can we still use historical data?
– Assessing the validity of historical data in a changing world
• Do we understand the uncertainties?
– Are we getting / giving the full picture?
• How should we deal with dependant and correlated events?
• How good are the models?
– Are we trying to be too clever?
– Is there a better way?
Catlin Group Limited
14
Are models always right or always wrong?
Model of an elephant
Catlin Group Limited
This is not an elephant
15
An elephant
Feature
Shape
Texture
Size
Actual
Model
Curves
Symmetry
Curves
Symmetry
Basically smooth
Wrinkly
Basically smooth
Wrinkly
~ 6m
~ 0.1m
( Electron : Universe ~ 10 -15m – 1027m )
Mass
~ 5,500 kg
~ 15g
( Electron : Universe ~ 10 -30g – 1055g )
Colour
Grey
White
( not R O Y G B I V )
Composition
Catlin Group Limited
C ; H ; O > 90% mass
e.g. PLA (C3H4O2)n
> 50% Water
Can contain water
16
Models are not wrong
• But are they the best answer?
• An incomplete set of equations
• Using uncertain parameters
• We need another way
• There is another way
• The challenge is to find it
Catlin Group Limited
17
Q&A
Catlin Group Limited
18