Catastrophe Modeling,9780387230825

Catastrophe Modeling

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ISBN13: 9780387230825
ISBN10: 0387230823
Format: Hardcover
Pub. Date: 2004-11-01
Publisher(s): Springer Verlag
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Summary

"Catastrophe Modeling: A New Approach to Managing Risk" is the first book that systematically analyzes how catastrophe models can be used for assessing and managing risks of extreme events. It focuses on natural disaster risk, but also discusses the management of terrorism risk. A unique feature of this book is the involvement of three leading catastrophe modeling firms, AIR Worldwide, EQECAT, and Risk Management Solutions, who examine the role of catastrophe modeling in rate setting, portfolio management and risk financing. Using data from three model cities (Oakland, CA, Long Beach, CA and Miami/Dade County, FLA), experts from the Wharton School of the University of Pennsylvania examine the role of catastrophe modeling to develop risk management strategies for reducing and spreading the losses from future disasters. Given the uncertainties associated with terrorism the book points out the opportunities for utilizing catastrophe models to set insurance rates and to examine public-private partnerships for providing financial assistance in the event of a terrorist attack.

Table of Contents

Preface and Acknowledgements xiii
Prelude xvii
PART I - Framework for Risk Management Using Catastrophe Models
1(42)
Introduction: Needs, Stakeholders, and Government Initiatives
3(20)
Patricia Grossi
Howard Kunreuther
Need to Manage Risk
3(4)
Private Sector Stateholders in the Management of Risk
7(6)
Property Owners
8(1)
Insurers
9(1)
Reinsurers
10(1)
Capital Markets
10(1)
Rating Agencies
11(1)
State Insurance Commissioners
11(1)
Other Stakeholders
12(1)
Government's Role in Management of Risk
13(6)
Types of Programs
13(2)
Federal Disaster Insurance
15(4)
Summary of Chapter
19(1)
References
20(3)
An Introduction to Catastrophe Models and Insurance
23(20)
Patricia Grossi
Howard Kunreuther
Don Windeler
History of Catastrophe Models
23(3)
Structure of Catastrophe Models
26(1)
Uses of a Catastrophe Model for Risk Management
27(2)
Derivation and Use of an Exceedance Probability Curve
29(5)
Generating an Exceedance Probability Curve
29(3)
Stakeholders and the Exceedance Probability Curve
32(2)
Insurability of Catastrophe Risks
34(5)
Conditions for Insurability of a Risk
35(1)
Uncertainty of Losses
36(1)
Highly Correlated Losses
37(1)
Determining Whether to Provide Coverage
38(1)
Framework to Integrate Risk Assessment with Risk Management
39(1)
Summary and Relationship to Parts II-IV
40(1)
References
41(2)
PART II -- Natural Hazard Risk Assessment
43(50)
The Risk Assessment Process: The Role of Catastrophe Modeling in Dealing with Natural Hazards
45(24)
Mehrdad Mahdyiar
Beverly Porter
Introduction
45(2)
Hazard Module
47(11)
Locations of Potential Future Events
47(4)
Frequency of Occurrence
51(3)
Parameterizing Severity at the Hazard's Source
54(1)
Parameters for Local Intensity and Site Effects
55(3)
Inventory Module
58(1)
Vulnerability Module
59(5)
Identification of Typical Buildings
60(1)
Evaluation of Building Performance
60(4)
Loss Module
64(1)
Summary
65(2)
References
67(2)
Sources, Nature, and Impact of Uncertainties on Catastrophe Modeling
69(24)
Patricia Grossi
Don Windeler
Introduction
69(1)
Classifications of Uncertainty
70(1)
Sources of Uncertainty
70(4)
Representing and Quantifying Uncertainty
74(5)
Logic Trees
74(2)
Simulation Techniques
76(2)
Uncertainty and the Exceedance Probability Curve
78(1)
Case Studies in Uncertainty
79(10)
Hurricane Hazard: Florida
79(3)
Earthquake Hazard: Charleston, South Carolina
82(7)
Summary and Conclusions
89(1)
References
90(3)
PART III -- Linking Risk Assessment With Insurance
93(72)
Use of Catastrophe Models in Insurance Rate Making
97(22)
Dennis Kuzak
Tom Larsen
Introduction
97(1)
Actuarial Principles
98(2)
Use of Catastrophe Models in Rate Making
100(6)
A Simple Rate Making Model
100(2)
Differentiating Risk
102(4)
Regulation and Catastrophe Modeling
106(2)
Case Study of Rate-Setting: California Earthquake Authority
108(7)
Formation of the CEA
108(1)
Rate-Setting Procedures
109(6)
Future Research Issues
115(1)
Open Issues for Using Catastrophe Models to Determine Rates
115(2)
Summary
117(1)
References
118(1)
Insurance Portfolio Management
119(16)
Weimin Dong
Patricia Grossi
Introduction
119(1)
Portfolio Composition and Catastrophe Modeling
120(5)
Portfolio Composition
120(1)
Catastrophe Modeling -- Bottom-up Approach
121(3)
Portfolio Aggregation
124(1)
Portfolio Management Example
125(2)
Understanding Risk
126(1)
Underwriting and Risk Selection
127(1)
Special Issues Regarding Portfolio Risk
127(5)
Data Quality
128(1)
Uncertainty Modeling
129(1)
Impact of Correlation
130(2)
Summary
132(1)
References
133(2)
Risk Financing
135(30)
David Lalonde
Introduction
135(1)
What Risks Should Be Financed?
136(3)
Level of Risk
137(1)
Probable Maximum Loss (PML)
138(1)
Risk Financing Mechanisms
139(19)
Generating Funds Internally
139(2)
Risk Transfer -- Reinsurance
141(2)
Risk Transfer -- Securitization
143(2)
Securitization Structures
145(11)
Dealing With Basis Risk
156(2)
The Costs of Risk Transfer
158(1)
Evaluation of Risk Financing Schemes
159(4)
Analyze Current Risk Profile
160(1)
Customize Decision Model
160(1)
Establish Performance Measures, Constraints, Critical Function
160(1)
Develop Risk Management Alternatives
161(1)
Evaluate Alternative Strategies
161(1)
Select, Implement, and Monitor Strategy
162(1)
Summary
163(1)
References
164(1)
PART IV -- Risk Management Strategies Using Catastrophe Models
165(70)
The Impact of Mitigation on Homeowners and Insurers: An Analysis of Model Cities
167(22)
Paul Kleindorfer
Patricia Grossi
Howard Kunreuther
Introduction
167(2)
Framework of Analysis
169(2)
Construction of Model Cities
171(4)
General Model Structure
171(1)
Mitigation Measures
172(1)
Books of Business for the Insurance Companies
172(2)
Insurance Company Premium and Asset Levels
174(1)
Incorporating Uncertainty Into Analysis
174(1)
Insurer Decision Processes
175(3)
Impact of Mitigation on Losses and Insurer Behavior
175(3)
Homeowner Decision Processes
178(3)
Factors Influencing Mitigation Adoption Decisions
178(3)
The Interaction of Mitigation Decisions and Insurance Decisions
181(1)
Implications for Workable Public-Private Partnerships
181(5)
Role of Building Codes
183(1)
Long-Term Mitigation Loans
184(1)
Lower Deductibles Tied to Mitigation
184(2)
Conclusions
186(1)
References
187(2)
The Impact of Risk Transfer Instruments: An Analysis of Model Cities
189(20)
Howard Kunreuther
Paul Kleindorfer
Patricia Grossi
Introductions
189(1)
Framework for Evaluating Alternative Strategies
189(2)
Evaluating Different Strategies for the Insurer
191(2)
Impact of Indemnity Contracts on Insurer Performance
193(4)
Excess-of-Loss Reinsurance Using Strategy 1
194(2)
Comparison of Performance Across Insurer's Strategies
196(1)
Catastrophe Bonds As Additional Sources of Funding
197(8)
Structure of Catastrophe Bond for Oakland
198(3)
Impact on Insurer's Performance in Oakland
201(2)
Performance of Catastrophe Bonds Across Different Regions
203(1)
Multi-Region Catastrophe Bonds
204(1)
Extensions of the Analysis
205(1)
Conclusions
206(2)
References
208(1)
Extending Catastrophe Modeling To Terrorism
209(26)
Howard Kunreuther
Erwann Michel-Kerjan
Beverly Porter
Introduction
209(1)
September 11, 2001: Impacts on Terrorism Insurance
210(1)
The Nature of Terrorism Coverage
211(4)
Insurability Issues
212(1)
Expanding Capacity Through Catastrophe Bonds
212(1)
Potential Role of Catastrophe Bonds
213(2)
Comparison of Terrorism Risk with Natural Disaster Risk
215(1)
Terrorism Risk Insurance Act of 2002
216(2)
Public-Private Risk Sharing Under TRIA
216(2)
Challenge for Insurers and Firms: Quantifying the Residual Risk
218(1)
Catastrophe Models for Terrorism Risk
218(9)
Terrorism Hazard
219(3)
Inventory
222(1)
Vulnerability
222(2)
Workers' Compensation Loss
224(2)
The ISO Advisory Loss Costs
226(1)
Low Insurance Demand for Terrorism Coverage
227(2)
Empirical Evidence
227(1)
Heuristics and Biases
228(1)
Future Research Directions
229(3)
Vulnerability Analyses
229(1)
Risk Perception
229(1)
Interdependencies
230(2)
References
232(3)
Glossary 235(6)
Index 241

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