Ocean Marine Overview and Catastrophe Modeling Issues Steven

Ocean Marine Overview and Catastrophe Modeling Issues Steven G. Searle, FCAS SVP Instrat

2000 – 2005 US Cat Losses

2005 Hurricane Losses Impact on Marine and Offshore Energy Ø Offshore Energy – Katrina l l RMS estimates between $2 bn and $5 bn Eqecat expects a loss ranging from $5 bn to $8 bn – Rita l Ø RMS estimates between $1 bn and $2 bn Yacht – Katrina l Ø Insurance losses range from $300 M to $400 M. (Boat Owners Association of The United States- Oct 12, 2005) Hurricane Katrina also destroyed an estimated 75% of the marinas along 150 miles of the Gulf Coast

Ocean Marine Ø Agenda – Marine Overview – Marine Results – Marine Catastrophe Modeling Developments

Ocean Marine Ø Agenda – Marine Overview – Marine Results – Marine Catastrophe Modeling Developments

Ocean Marine Ø Lines of Business – – – Cargo Hull (blue-water, brown-water) Commercial Protection and Indemnity (P&I) Liability Yacht (including P&I) Offshore Energy

Ocean Marine Split by LOB CY Direct Written Premiums Source: AIMU 2005 Calendar Year Operating Ratios

Ocean Marine Ø Agenda – Marine Overview – Marine Results – Marine Catastrophe Modeling Developments

Calendar Year Ocean Marine Results Direct Business Source: AM Best Aggregates and Averages

Calendar Year Ocean Marine Results Net Business Source: AM Best Aggregates and Averages

Calendar Year US Marine Results Direct Written Premiums ($B) and Net Combined Ratio Companies reporting to the American Institute of Marine Underwriters Source: AIMU 2005 Calendar Year Operating Ratios

US Calendar Year Net Combined Ratios LOB detail Companies reporting to the American Institute of Marine Underwriters Source – AIMU 2005 Calendar Year Operating Ratios

US Calendar Year Net Combined Ratios LOB detail (cont. ) Companies reporting to the American Institute of Marine Underwriters Source – AIMU 2005 Calendar Year Operating Ratios

US Calendar Year Net Combined Ratios LOB detail (cont. ) Companies reporting to the American Institute of Marine Underwriters Source – AIMU 2005 Calendar Year Operating Ratios

Ocean Marine Ø Agenda – Marine Overview – Results – Marine Catastrophe Modeling Developments

Catastrophe Modeling Vendors Applied Insurance Research (AIR), EQECAT or Risk Management Solutions (RMS) Ø valuable knowledge inputs to identify, understand manage risk

Modeled Perils Ø hurricane – wind – loss amplification/demand surge – storm surge Ø earthquake – – Ø Ø Ø shake fire following sprinkler leakage loss amplification/demand surge other wind winter storm terrorism flood (Europe) pandemics

Modeled Lines of Business Ø Ø Ø Ø Personal lines property Commercial lines property Industrial property Builders Risk Auto Physical Damage Workers Compensation Lives at risk – Accident and Health Marine (partially*) Marine lines • Fixed Properties (marinas) - handle well • Contents (warehouse cargo) - can handle with adjustments • Oil Rigs - modeling capabilities available • Mobile Property (cargo, floaters) - capabilities exist but are limited • Yachts - capabilities in the RMS May 2006 release • Commercial Hull (? )

Modeled Coverage Parts Ø Ø Fixed Property – completed structures – structures under construction (e. g. shipbuilders risk) – machinery & equipment – piers / wharves – offshore platforms Personal Property – contents – stock – electronic Data Processing equipment Mobile Property – cargo – floaters including contractors equipment (though generally difficult to include) – personal yachts Time Element

The Four Catastrophe Model Modules Module 1 Data Preparation Module 2 Event Database Module 3 Damage Calculation Module 4 Loss Calculation

Model Applications - Loss Potential “Occurrence" Return Period Losses Annual Probability of Non-Exceedance Return Period 90. 00% 10 95. 00% 20 98. 00% 50 • U. S. Hurricane 99. 00% 100 • U. S. Earthquake 99. 60% A. M. Best Benchmarks Damage (000 s) Gross (000 s) Net (000 s) $9, 427 $8, 359 $8, 025 $18, 814 $16, 378 $15, 723 $33, 724 $32, 194 $30, 906 $48, 803 $47, 979 $46, 060 250 $78, 865 $75, 338 $72, 324 99. 80% 500 $100, 622 $96, 395 $92, 539 99. 90% 1, 000 $123, 950 $118, 776 $114, 025 $3, 597 $3, 482 $3, 343 Average Annual Loss

Yacht Modeling Capabilities X RMS Risk. Link May 2006 release

RMS Construction Classification Update Risk. Link version 6. 0 (May, 2006) Ø Seven New RMS Yacht Classes (length and power) – Boats, inside a Building (Marina) - Precast Reinforced – – – Concrete with Concrete Roof (RMS Code 54) Boats, Moored, Less than 26 ft, Motor - (RMS Code 55) Boats, Moored, Less than 26 ft, Sail – (RMS Code 56) Boats, Moored, 26 -60 ft, Motor - (RMS Code 57) Boats, Moored, 26 -60 ft, Sail (RMS Code 58) Boats, Moored, Greater 60 ft, Motor (RMS Code 59) Boats, Moored, Greater 60 ft, Sail (RMS Code 60)

Offshore Energy Modeling/Databases Ø RMS currently has offshore modeling capabilities – Version 6. 0 Changes l l l Ø Ø new construction classes new year built ranges new occupancy classes includes Contingent Business Interruption, Operators Extra Expense new loss amplification factors specific to offshore platforms EQE to release offshore energy model ERAS - database program used by many energy clients for capturing exposure information by platform – Exposure management only, no damage estimates or simulations of events.

Outlook Ø Ø Role of Actuaries and Catastrophe Modelers continues to grow in the Marine renewal process. Models will continue to be valuable as one of many information inputs… – but extremely dangerous if used as the only information input Ø Models have improved risk quantification significantly… – but can mislead if users do not understand shortcomings Ø Applications can create significant marketplace advantages… – but inappropriate applications can create hidden dangers Ø Models continue the tradition of innovation and progress… – but models are “not" perfect and need to improve

Questions