Be Certain to Avoid Uncertainty The Importance of

Be Certain to Avoid Uncertainty The Importance of Controlling Uncertainty in CAT Risk Management July 19, 2012 Richmond W. Wall Senior Vice President Natural Hazards Solutions Development Leader Atlanta, GA

Course Outline • Typical Steps of a CAT Centric Property Placement • Critical points in the process • Possible effects of uncertainty on the process • Controlling the uncertainty • Conclusion MARSH December 24, 2021 1

Typical Steps of an Ideal CAT Centric Property Placement • Combine Statement of Values and construction information to develop modeling input sheet. • Perform modeling on the portfolio. • Using the results of the modeling, develop a strategy and policy structure that satisfies the clients requirements. • Provide the input data to the markets for modeling. • Negotiate terms. • Place program. MARSH December 24, 2021 2

Modeling and Its Role in Placements • CAT exposed placements are heavily dependent on modeling. • Modeling is heavily dependent on input data. • By extrapolation successful CAT placements are highly dependent on data quality. • Poor data quality can increase both the base losses as well as increase the uncertainty associated with the losses. • Since the modeled losses are produced at high confidence levels, the uncertainty in the modeling calculations can have a significant impact on the loss expectancies. • This characteristic of the models make it easier to lower loss projections than to increase them by providing additional input data. MARSH December 24, 2021 3

Examination of the Effects of Uncertainty on Modeling • Modeling, like underwriting, is defined by uncertainty. • The lack of modeling data will typically result in higher mean losses and standard deviations or coefficients of variation (CV’s). • This increase in standard deviation normally results in increased loss expectancies including the average annual losses (AAL’s). • AAL is a measure of the “pure” or unloaded premium for a portfolio. MARSH December 24, 2021 4

Modeling’s Potential Impact on Placement • Most insurance carriers utilize the average annual losses (AAL’s) to set or at least assist in setting premium levels. • AAL’s are heavily impacted by input data quality. • For surge exposed properties, the AAL can normally be significantly reduced by providing a ground floor elevation for the facilities. • By reducing the AAL’s, the premium levels can also be reduced significantly. • Underwriters may also increase premium to account for the additional uncertainty associated with a portfolio due to poor data quality. MARSH December 24, 2021 5

Glynn County Georgia Cat. DQ Project • Chose 11 of the Hurricane AAL Loss Drivers in the portfolio that made up 26% of the total AAL for Georgia. • Performed site visits for these locations to develop high quality modeling data. • Reduced the AAL for the 11 locations by 72% which resulted in an overall reduction in AAL of approximately 20%. • Removed approximately $300, 000 worth of AAL for this portfolio. MARSH December 24, 2021 6

Conclusion • Premium for Catastrophic Natural Hazard Capacity is linked very closely to Average Annual Loss generated by the CAT Models. • Generally a large portion of the AAL for a portfolio is driven by a small portion of the total portfolio. • By improving the input data for the portfolio, the AAL can be significantly reduced, which should result in premium savings. Many times the savings will be more than the reduction in AAL due to the premium multiplier. • By providing reports that document the process used to determine the coding the uncertainty the underwriter has around the portfolio will be reduced and should result in additional savings. • Finally, always remember…”Be Certain to Avoid Uncertainty” MARSH December 24, 2021 7