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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:
Fig 1: A typical wind speeds conour map (windfield) for a storm
The following five examples, which illustrate the use of GIS software applications for risk insurance and reinsurance industry, will be discussed in the subsequent sections.
To study the catastrophe-exposed business of an insurance company (called the “exposure”), simple GIS-based tools are used. The data about the insured locations and the associated policies, as made available by the insurance companies, can be imported into such a tool. A basic use of this tool could be to simply thematic display of the overall exposure, in which the colors are assigned to each geographic unit based on the insured value. For further analysis, the break-up of this total value of exposure by line of business (say, residential, commercial and industrial), or by building construction class, can be computed. For locations in earthquake prone zone, their proximity to fault zones could be studied. For locations exposed to cyclone risk, a study of how the exposure is distributed with respect to the distance from the coastline can also be done. In a nutshell, a GIS software application can be developed to enable a quick import, display, thematic mapping and analysis of the exposure data. It can facilitate in assessing the areas of exposure concentration, and this information can be used for further decision-making.
Wind Hazard Assessment of the Insured Sites
For the wind-related perils (cyclones, hurricanes, windstorms, and typhoons, referred in this paper as “windstorm”), the important spatial aspects are track of the windstorm, and the “windfield” associated with it. The windfield defines the spatial distribution of the wind speeds in the vicinity of the track. The track, as well as the windfield, are dynamic in nature, and have a spatial (space-dependent) as well as a temporal (time-dependent) component. Use of GIS software applications allows a powerful modeling of these events and the spatial distribution of risk associated with them. Such applications can enable automated and fast computations of wind speeds at any given site (defined through a set of coordinates) due to a single or a set of storms passing near to that site. Shape files (ArcInfo files) corresponding to the storms can be used as input for the wind field (the distribution of wind speeds) calculations, to generate the wind field parameters for each site affected by the selected storms. The power of GIS can also be used to plot the wind speed contours. A set of such contours, prepared for some defined time interval during the passage of the storm, can be superimposed over the locations layer, and hence, the pattern of wind speeds around the desired location can be observed at various time steps. Such applications can be used as input in the overall framework of risk-modeling for wind-perils
Intranet based Underwriting Solution for Flood Risk
A web browser-based, underwriting application, which combines flood hazard and loss data, loss modeling, and underwriting guidelines can be used for developing underwriting workstations. It can be used by the underwriters to analyze their flood-insured accounts consisting of many locations and policies, by determining the flood risk associated with those locations. This information helps the underwriter to decide about the premium and the policy structure. This will comprise of the following steps:
Fig 2: Catastrophic insurance market share study by an insurance company
Strategic Capital Allocation by an Insurance Company
A GIS-based optimization study can be performed to maximize a company specified objective subject to company specified constraints. The input to such a simulation would include the following:
GIS Software Applications for the Study of Terrorism Risk
The GIS software applications can also be used for the study of man-made disasters, but the limited understanding about the nature of these risks poses a limitation for such applications. Here is a typical framework for a hypothetical application for study of terrorism risk:
Input
Conclusions
Insurance companies are increasingly using various risk management techniques to reduce their losses due to catastrophes, both natural and man-made, and to optimize their overall benefits. Since the process of risk management involves analyzing huge volume of the spatial data in a fast and efficient manner, use of GIS functionality within the overall framework of a risk management software application provides many benefits. Such GIS-based software applications are being used extensively, and in many ways, for effective risk management by the insurance and reinsurance industry. Some new innovative ways to explore the power of GIS software applications for the study of new types of risks have also been tried in the recent past and the trend is expected to continue in the future as well.
GIS software applications for catastrophic risk management in the insurance and reinsurance industry
Naresh Raheja
General Manager, RMSI, Noida
nareshr@riskinc.com
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.
Fig 1: A typical wind speeds conour map (windfield) for a storm
The following five examples, which illustrate the use of GIS software applications for risk insurance and reinsurance industry, will be discussed in the subsequent sections.
- Multi-peril exposure analysis
- Wind hazard assessment of the insured sites
- Intranet based underwriting solution for flood risk
- Strategic capital allocation by an insurance company
- GIS software applications for study of terrorism risk
To study the catastrophe-exposed business of an insurance company (called the “exposure”), simple GIS-based tools are used. The data about the insured locations and the associated policies, as made available by the insurance companies, can be imported into such a tool. A basic use of this tool could be to simply thematic display of the overall exposure, in which the colors are assigned to each geographic unit based on the insured value. For further analysis, the break-up of this total value of exposure by line of business (say, residential, commercial and industrial), or by building construction class, can be computed. For locations in earthquake prone zone, their proximity to fault zones could be studied. For locations exposed to cyclone risk, a study of how the exposure is distributed with respect to the distance from the coastline can also be done. In a nutshell, a GIS software application can be developed to enable a quick import, display, thematic mapping and analysis of the exposure data. It can facilitate in assessing the areas of exposure concentration, and this information can be used for further decision-making.
Wind Hazard Assessment of the Insured Sites
For the wind-related perils (cyclones, hurricanes, windstorms, and typhoons, referred in this paper as “windstorm”), the important spatial aspects are track of the windstorm, and the “windfield” associated with it. The windfield defines the spatial distribution of the wind speeds in the vicinity of the track. The track, as well as the windfield, are dynamic in nature, and have a spatial (space-dependent) as well as a temporal (time-dependent) component. Use of GIS software applications allows a powerful modeling of these events and the spatial distribution of risk associated with them. Such applications can enable automated and fast computations of wind speeds at any given site (defined through a set of coordinates) due to a single or a set of storms passing near to that site. Shape files (ArcInfo files) corresponding to the storms can be used as input for the wind field (the distribution of wind speeds) calculations, to generate the wind field parameters for each site affected by the selected storms. The power of GIS can also be used to plot the wind speed contours. A set of such contours, prepared for some defined time interval during the passage of the storm, can be superimposed over the locations layer, and hence, the pattern of wind speeds around the desired location can be observed at various time steps. Such applications can be used as input in the overall framework of risk-modeling for wind-perils
Intranet based Underwriting Solution for Flood Risk
A web browser-based, underwriting application, which combines flood hazard and loss data, loss modeling, and underwriting guidelines can be used for developing underwriting workstations. It can be used by the underwriters to analyze their flood-insured accounts consisting of many locations and policies, by determining the flood risk associated with those locations. This information helps the underwriter to decide about the premium and the policy structure. This will comprise of the following steps:
- Display of base map: A base map displays the geographical area for a specific location, which is defined by the user. Alternatively, the user can select a specific location on the generated base map, which returns the latitude and longitude of that location.
- Display of flood map: A flood map displays the flood zone around a specific location.
- Detailed Flood Risk Analysis: For more accurate results, a sophisticated flood-risk engine can be added in the system, or it can be done through a separate analysis server.
- Computation of “RiskScore”: The location is assigned a low-risk, moderate-risk, or high-risk, and a corresponding rating (defined as “Risk Score”) is assigned
- Use of underwriting guidelines: The specific guidelines will be used to decide the premium and policy structure for the location.
Fig 2: Catastrophic insurance market share study by an insurance company
Strategic Capital Allocation by an Insurance Company
A GIS-based optimization study can be performed to maximize a company specified objective subject to company specified constraints. The input to such a simulation would include the following:
- The variable a company wishes to optimize; such as profit, premium or market share
- Acceptable loss level – by region (defined through a GIS framework)
- Constraints (available capital, risk appetite and governmental guidelines for each region)
- The exposure (insured value, policy structure, and building characteristics for each location)
- The risk profile (generated through using a separate risk model)
GIS Software Applications for the Study of Terrorism Risk
The GIS software applications can also be used for the study of man-made disasters, but the limited understanding about the nature of these risks poses a limitation for such applications. Here is a typical framework for a hypothetical application for study of terrorism risk:
Input
- Exposure (for example, the location and the insured valued for the critical buildings within a specified region, and the nature of built environment around them)
- Hazard: Probability and the possible nature of the terrorist attack (based on input from experts in this field), defined as events.
- Vulnerability: Inventory of building types in the region and their proneness to terrorism hazard
- Develop loss scenarios corresponding to all possible events, using the above input
Conclusions
Insurance companies are increasingly using various risk management techniques to reduce their losses due to catastrophes, both natural and man-made, and to optimize their overall benefits. Since the process of risk management involves analyzing huge volume of the spatial data in a fast and efficient manner, use of GIS functionality within the overall framework of a risk management software application provides many benefits. Such GIS-based software applications are being used extensively, and in many ways, for effective risk management by the insurance and reinsurance industry. Some new innovative ways to explore the power of GIS software applications for the study of new types of risks have also been tried in the recent past and the trend is expected to continue in the future as well.