GIS software applications for catastrophic risk management in the insurance and reinsurance industry


Naresh Raheja
General Manager, RMSI, Noida
nareshr@riskinc.com

Abstract
Each year, the insurance and reinsurance companies have to pay out huge amounts after any catastrophic events, and consequently, their profit margins are affected significantly. Hence, a thorough study of the risks associated with such catastrophes is quite important in this scenario. While the risk due to natural catastrophes remains high, the risk due to man-made disasters has also been increasing, as also highlighted by the very recent September 11 event, and the subsequent chaos. In the process of understanding the nature of risk due to any catastrophic event, which is an crucial input to the underwriting and risk management strategy formulation by an insurance and reinsurance company, a study of the spatial aspects of the problem is an integral component of the overall approach. For the purpose of effective risk assessment and management of catastrophes, manmade or natural, three main aspects need to be studied – the nature of exposure (the locations which have been insured, and the underlying policies), the natural hazard associated with this exposure and the vulnerability of the built environment. Given the huge volume of the spatial as well as non-spatial data, and the complex nature of risk modeling, including for the spatial parameters, involved in these studies, it is desirable to include at least some GIS functionality in the overall framework of a risk management software application. It can range from having just a simple display of input or output data through the application, which can be used for decision making by the experts, to having sophisticated GIS-based analysis engines within the software application. This paper will present an overview of how the GIS software applications can be used for effective decision making for catastrophes risk management by the insurance and reinsurance industry. A few case studies on the use of GIS software applications for earthquake, wind-peril, fire and flood risk management will also be presented. In recent past, use of GIS software applications for the study of some emerging and extremely high damage potential man-made risks (for example, the terrorism risk) have also been envisaged, and a simplified framework for simulation and analysis of such events using the GIS software applications will also be presented.

Introduction
“According to preliminary Swiss Re estimates, man-made and natural catastrophes claimed more than 33 000 lives worldwide in 2001. The direct financial loss from major events is expected to be more than USD 115 billion, of which over USD 32 billion will be borne by the insurance industry. The insured property and business interruption losses alone caused by the terrorist attacks of 11 September are put at USD 19 billion. These figures do not include the indirect negative impact on the equity markets and the global economy.”

From Swiss Re Sigma Study
In 2001, besides the September 11 event, storm Allison, flooding, hail and tornadoes caused widespread losses in US. Typhoon Nari, flooding and landslides hit Japan and Taiwan very badly. The Gujarat earthquake event has hardly faded away from anyone’s memory.

While the year 2001 was a particularly difficult year for the insurance industry, for every year in the past too, there have been huge losses due to various catastrophes, both natural and man-made, and the insurance industry has been bearing a significant portion of this loss. In view of this fact, effective catastrophic risk management is crucial for not only the growth of an insurance company, but also for its survival.

Use of GIS Software Applications for Effective Risk Management

The process of risk management involves the following steps:

• Establishment of objective for risk management: When developing a strategic growth plan for a catastrophe-exposed business of an insurance company (called the “exposure”), the goal could be to maximize premiums, profits, market share and/or return of investment, for the overall geographic region of operation. Also, the risk needs to be contained within some acceptable limits (defined as “risk appetite”). Since the premium contribution and risk appetite corresponding to each territory within this geographic region would vary, GIS software applications are used to study and analyze this spatial variation.
• Quantification of current and future risk for the exposed area (making a “risk profile”): This is the most important part of the overall risk management process. It involves three phases: exposure analysis (study of the catastrophe-exposed locations), risk modeling (estimation of losses based on a study of natural hazard and built environment for these locations), and loss analyses (identifying the key drivers of the loss). Since the risk factors are location dependent, GIS tools can be used for effective risk analysis.
• Maximize the benefits (as defined by the objectives and constraints) for the given risk profile: Since both these aspects are spatial in nature, GIS tools can effectively be used along with some suitable optimization algorithms
• Develop and implement underwriting guidelines: In the final step, and using the results available from the previous steps as input, the underwriting guidelines are developed. The process of underwriting involves developing a suitable insurance policy and its pricing. Intranet and Internet GIS applications can be effectively used to assess the required spatial data, for example the location coordinates, the risk profile, and the guidelines specific to different regions. This information can be used by the underwriters from anywhere within the organization (using Intranet GIS applications), or from anywhere in the world (using Internet GIS applications), as required.