Reducing Cat Risks

Open to Improvement

Frustration with property CAT models is leading to change.
By: | October 1, 2014 • 8 min read

U.S. risk professionals with significant hurricane and other CAT-prone exposures are looking for a clearer picture when it comes to catastrophe loss modeling, an area fraught with confusion and increasing criticism.

Time and again, those whose risks are being evaluated have complained that they have too little control over how their specific exposures generate loss estimates, and how those estimates are calculated.

“Open” systems and “transparency” have become the buzzwords of the catastrophe modeling community of late, but how user-friendly will the newest catastrophe models really become over the next year or so?

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It’s a question that the Oasis Loss Modeling Framework hopes to help answer. The London-based nonprofit represents a total of 25 insurers, reinsurers and brokers, including units of Allianz, Zurich, SCOR, Liberty Mutual, Willis, Guy Carpenter, Hiscox, RenaissanceRe and PartnerRe.

Oasis announced in January that its framework would bring down the cost of modeling, and provide transparency and greater flexibility for users via a program that is open to anyone with an interest in creating new catastrophe risk models.

Hopes are high. Still, the reality is that thus far, Oasis has no models available for U.S. hurricane and quake, though program developers hope to have such models available by the end of the year, said Dickie Whitaker, Oasis project director.

Initially, Oasis will offer models of floods in Great Britain and Australia, earthquake in North Africa and the Middle East, and brush fire in Brazil, Whitaker told Risk & Insurance®.

Scott Clark, risk and benefits officer for the Miami-Dade County Public School system, said he wants to see Oasis offer a global open platform that would allow those most knowledgeable about the school system’s risks to go into a modeling system and enter information that will produce the best outcomes — as opposed to the rather limited current system.

“I would like to be able to drill down into second- and third-tier modifiers to best affect the modeling outcomes including roof strapping, roof construction, etc.” — Scott Clark, risk and benefits officer for the Miami-Dade County Public School system

“I would like to be able to drill down into second- and third-tier modifiers to best affect the modeling outcomes including roof strapping, roof construction, etc.,” said Clark.

Currently, critics said, traditional models have been too focused on the aggregation of risk that insurers tend to calculate — rather than individual exposures and properties.

Year-to-Year Variations

The modelers are also criticized for changing models from year to year in ways that do not reflect actual changes in loss exposure.

“There is a tremendous variation between RMS 11 and RMS 13,” said John Burkholder, director of risk management for Broward County, Fla.

For example, when Marsh compared the two models, it found that medium-term rates (which represent storm activity potential based on climate conditions over the next five years) were reduced 28 percent in RMS version 13 for CAT 3 to CAT 5 events, while the nationwide average was reduced 16 percent.

“How could you have that much variation in risk exposure over just a two-year period?” asked Burkholder. “It’s difficult to reconcile those models with the actual individual risks.”

Claire Souch, senior vice president of business solutions, RMS

Claire Souch, senior vice president of business solutions, RMS

Claire Souch, senior vice president of business solutions at RMS in London, said that the main drivers of change between RMS 11 and RMS 13 came from new insights into hurricane activity: the number of hurricanes per year, where hurricanes are formed and where they make landfall.

“The scientific view of hurricane activity has changed since 2011, in part because of the considerable research RMS and other organizations have carried out to determine what drives hurricane landfall frequency,” she said.

“Ocean temperatures in the Atlantic have been increasing,” she said.

“Yet, over the last few years we’ve seen very low levels of hurricanes making landfall, something that the change between the 2011 and 2013 model versions reflected,” said Souch.

Clark of Miami-Dade County schools echoed the concerns of many risk managers.

He recalled the impact of the controversial RMS version 11, which initially more than doubled the school district’s probable maximum losses (PML) to $1.9 billion, making it difficult for Clark to assemble the insurance limits he needed — until he got another modeling firm to reassess the risk.

The way it’s worked traditionally using RMS, AIR or EQECAT modeling, there is a huge blind spot for risk managers and others wanting to know how the models project losses, he said.

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Karen Clark of catastrophe risk modeling firm Karen Clark & Co. in Boston, said she understands risk managers’ concerns.

Traditional models may lack quantifiable data and can change quickly and dramatically, she said. When risk specialists are dealing with countrywide exposures, geographical changes may be less critical.

“The traditional models are not robust for individual locations and concentrated exposures.” — Karen Clark,co-founder and CEO, Karen Clark & Co.

Traditional models were never designed with risk managers in mind but with insurers in mind, she said.

“The traditional models are not robust for individual locations and concentrated exposures,” she said.

Models and Granularity

Often, risk managers and their brokers need to bring their underwriters’ attention to outliers that don’t fit with the usual assumptions.

That is one of the problems with traditional models, said Burkholder of Broward County.

“We’ve got a bulkhead at Port Everglades which models as a building,” Burkholder said.

However, it is not nearly as vulnerable.

“It is constructed solely of concrete and steel, so the model should, for loss modeling purposes, recognize its actual characteristics in the results to more accurately reflect the correct exposure,” he said.

In an effort to address some of the problems — particularly with making their systems more transparent to users, all three of the major CAT modeling vendors have released new products: Touchstone from AIR Worldwide, Risk Quantification & Engineering (RQE) from EQECAT and RMS(one) from RMS.

Souch of RMS said that RMS(one) provides “an exposure and risk management platform that enables any company to store and analyze all of the information they have about their risk, acting as a system of record for all of the risk items in the business, with the ability to run RMS and other models.”

She said RMS(one) is exposure and model agnostic so it allows companies to use catastrophe models to simulate what the impact of a hurricane or other disaster might be for all the exposures they have.

In addition, RMS’ models on RMS(one) are open and enable users to understand the impact of different scenarios, she said, such as if three hurricanes made landfall in one year instead of a single hurricane.

AIR Worldwide’s Touchstone is “an open platform, allowing clients to import third-party hazard layers or run multiple alternative models on a single platform for a more complete view of risk,” according to the company.

The major CAT modeling vendors have attempted to address some of the criticisms related to transparency.

Once more, the emphasis is on transparency and user interface.

“For example, say you believe losses from CAT 3 hurricanes should be 10 percent higher than AIR’s standard model says they are,” said Rob Newbold, senior vice president with AIR Worldwide.

A user can go into Touchstone and modify losses to better reflect their loss experience, or their own underwriting policies.

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“However, there will always be the AIR default view, alongside any modified views,” said Newbold.

Several firms are now providing data and models through Touchstone. These include Ambiental, ERN, EuroTempest, IHS Inc., KatRisk, Met Office, PERILS, and SSBN.

EQECAT has its own take on the “open model” approach.

Rodney Griffin, senior vice president of client solutions and product management for CoreLogic EQECAT, said that RQE’s simulation platform “runs 181 natural catastrophe probabilistic models for 90 countries across the globe.

The RQE platform is inherently open in that additional models or components such as the hazards or vulnerabilities can be added to the platform.

“CoreLogic EQECAT is committed to being transparent and this is reflected in the granularity of reports down to individual site levels and the very extensive documentation which includes analyses of the key drivers of risk,” Griffin said.

On the compliance side, with respect to Solvency II in Europe and ORSA in the United States, he said the company “provides tailored documentation to transparently support these requirements.”

Karen Clark, co-founder and CEO, Karen Clark & Co.

Karen Clark, co-founder and CEO, Karen Clark & Co.

Oasis, meanwhile, promises to offer perspectives from multiple modeling firms, including Karen Clark & Co. Clark noted that her company’s platform, RiskInsight, allows risk managers to build their own models.

At the same time, she said, companies can also take advantage of Oasis to see what other models say.

Other Oasis modelers include JBA Risk Management, Spa Risk LLC, and Long Beach, Calif.-based ImageCat, which plans to focus specifically on earthquake risk via SesmiCat.

“The compelling case for the Oasis is that risk managers will be able to have access to the best of breed models tailored for specific hazards and specific regions through a single portal and at a reasonable cost,” said Charles Huyck, executive vice president at SesmiCat creator ImageCat, Inc.

“SeismiCat, for example, can potentially provide risk managers access to a host of sophisticated earthquake modeling capabilities previously utilized only by the structural engineering community in the United States,” he said.

So how exactly does a risk manager tap Oasis?

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A risk manager can join as an associate member, which is free, said Whitaker. Full members are financial institutions or underwriters, all of whom pay a membership fee, he said.

Risk managers can download the software and search for a model of the geographical region and peril in question, and then negotiate their fee with the provider, he said.

Karen Clark said that the costs to access Oasis or RiskInsight will undoubtedly be a lot less than for the traditional modelers.

“Quite simply, you’re going to get more models on it,” Clark said when asked why industry members might want to tap Oasis versus an individual modeler like her firm.

“Via Oasis, you’ll be able to look at many different models’ views. That’s the [whole] idea,” Clark said.

Janet Aschkenasy is a freelance financial writer based in New York. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now and where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]