Robert Muir-Wood - insurers must create risk models on non-recent events

14 Jul 2016

The Chief Research Officer, RMS, moderated the discussion on “The challenges of unmodelled perils" at the 1st Catastrophe Knowledge Exchange event at the Swiss Re Centre for Global Dialogue.

Click here to find out more about the event

At the session moderated by Robert Muir-Wood, attendees were given a number of questions to ponder. In particular, they were tasked to identify which events (or components of events), since the year 2000, could be characterised as ‘surprise surprises’ – genuinely beyond the state of knowledge or science at the time – and which, while they felt like surprises, reflected a failure to imagine and apply the knowledge we already had. The three events that the groups felt should be included in the first category were the WTC attacks, the 2004 Indian Ocean tsunami and the 2011 earthquake (and its consequences) located directly beneath Christchurch New Zealand. The lesson is that while we can do better at applying our current knowledge, occasionally we can still expect true surprises. However, we need to focus our work and our imagination on expanding models to capture all the risk that we do understand. 

View Robert's presentation slides here

Read the text version of Robert Muir-Wood’s interview here:

“The core concept of modelling is very sound, but in order to capture enough of a risk you've got to look at all of the secondary consequences of extreme events in particular. You've got to look at classes of risk that you haven't seen in the past 10 or 20 years, which therefore maybe you think they simply don't happen. We haven't seen a really big volcanic eruption for a long time. An eruption could be extremely disruptive, in certain parts of the world would cause huge insurance losses, but we're not actually focused right now on modelling it because we haven't seen one recently.

In 2011 there were a lot of events which happened around the world which seemed surprising at the time. For example, the floods in Thailand - where people had not been tracking all their exposures in the flood zone. There was the earthquake in Japan, which was much, much bigger than had been anticipated could happen along that coast. There was the damage in New Zealand of all the liquefaction around Christchurch. I'm particularly interested in trying to stop us simply being surprised by catastrophes. What do we need to do? How do we need to expand the modelling? How do we need to be smarter, more imaginative at understanding what can happen?

We hope that modelling is gradually getting a bit better, a bit smarter at anticipating. I mean, it's never possible to say every eventuality has been conceived of, but actually we would hope that Katrina-like events where you have one class of catastrophe, in that case a hurricane, causing a secondary catastrophe of flooding - we hope we are more on top of those, but we are still going to be surprised going forward.

If we look at the US market in particular, it's very obvious that actually earthquake in California is significantly under-insured. The proportion of homeowners with earthquake coverage has dropped from about 30 percent, 15 or 20 years ago, to about 10 percent today. This is a shocking level of under-insurance. Actually the industry as a whole aught to be doing more not only to understand the protection gap in poorer countries, but there is a protection gap in richer countries too. It really should be a focus to sort that out.”

Click below to read the themes from the first Catastrophe Knowledge Exchange:

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