Modeling Catastrophe Risk to Marine and Energy Exposure in the Gulf of Mexico

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Modeling Catastrophe Risk to Marine and Energy
Exposure in the Gulf of Mexico

• Houston Marine Insurance Energy Seminar
• Hemant Shah, CEO Risk Management Solutions
• September 18, 2006

2
New Orleans, September 3 2005

• 70-80 of New Orleans flooded,
• 55 of the citys 147,000 properties inundated by
  more than 4 feet
• Maximum flood depths 18 feet.

3
New Orleans Before the Pumps, 1888
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The Expansion into the Floodplain

• Pumps initially deployed from 1913-1928

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1915 New Orleans Hurricane

• Cat 4 Hurricane, 20 miles east of New Orleans
  (Grand Isle)
• Whole country between Poydras and Buras
  inundated. Levees gone, property loss appalling.
  Life toll probably heavy. Conditions estimated
  worse than ever before. Relief needed. No
  Communications..."
• Storm struck before the construction of the
  Industrial Canal
• On the Mississippi River below New Orleans storm
  surge overtopped the levees below New Orleans and
  rose to 15-20 feet above sea level.
• Swells rolled up the river in New Orleans 10-12
  feet above high water.
• Water was carried into Lake Pontchartrain and
  overflowed the existing levees to flood western
  part of the city
• From the Old Basin canal (parallel to Orleans
  Avenue) to Broadway and from Claiborne Avenue to
  Lake Pontchartrain
• Flooding 1-8 feet
• After the passage of the storm the surge receded
  rapidly but the flood waters stayed in place for
  3-4 days in New Orleans and had to be removed by
  the drainage system
• (from1915 Monthly Weather Review).

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The Expansion into the Floodplain

• Second generation of pumps elevated to be able to
  function after a flood

Bayou St. Jean at Lake Pontchartrain
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1947 Hurricane

• Cat 3 directly over the City
• Surge overtopped LakePontchartrain levees
• 17th St Canal wall failed
• Up to 6 feet of water in parts of Jefferson
  parish
• Standing water for weeks
• Removed through cutting and blasting holes in the
  levees

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Growth of New Orleans
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New Orleans Canals
Industrial Canal (link between Lake
Pontchartrain and Mississippi R) 1923
Developed after 1945
Misssippi River Gulf Outlet 1965
Drainage Canals Mid 19th Century
Inner Harbor Navigation Canal 1923
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1965 Hurricane Betsy

• Cat 3 Hurricane
• 12 foot storm surge
• 60,000 homeless

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1965 Hurricane Betsy - Presidential Response
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2005 Hurricane Katrina - Presidential Response
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100 Years of Storm Surge Flooding
1915
1947
1965
2005
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One Disaster Sets The Terms For The Next
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Mayor Pomfhs Vision

• I want to give positive assurance that our
  friends will find Miami this winter the same
  enjoyable, hospitable, comfortable vacation city
  it has always been.
• I predict that Miami will make a world record
  come-backwe are ready to resume our place as the
  playground of the world
• Miami Mayor E.C. Pomfh
• speaking six days after the September 18, 1926
  storm struck south Florida

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Mayor Pomfhs VisionRealized

• 1990 Population of Dade and Broward alone exceed
  that of all 109 coastal counties (TX VA) in
  1930
• Of 67 coastal counties in LA -FL, pop. density
  is 2.5X national average
• During the Florida construction boom from 1970
  1990
• 70 of buildings in Broward and Palm Beach
  counties built in this period
• 75 increase in the population density in SE
  Florida
• Commercial values almost tripled in value
• The trend continues from 1990 to 2000
• The population of Broward County increased by
  29,
• and Collier County by 65
• Currently, 1,540 building permits issued in
  coastal counties every day

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U.S. Hurricane Risk, RiskLink v6.0
Tail (Hurricane)
Probability
40 60BKatrina
120 250B Miami Cat 5, NYC Cat 4
300 350B Worst Case
Loss
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The Capital Crunch will Catalyze Change

• New capital entering the market?
• Capital markets alternatives?
• Shortage of cover
• Change in market architecture?

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What is a Catastrophe Model?
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Utility of a Catastrophe Model
Geography of Risk
Demographics of of Risk (Gross/Net)
Probability of Risk (EP Curve)
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Offshore Platform Modeling FrameworkRMS RiskLink
v6.0, Released May, 2006
Define Hurricane
Claiming

• Storm parameters
• Basin-wide tracks, realistic time histories
• Onshore and offshore clash

• Time-stepping windfield calculations
• Windspeed and wave height
• Submarine landslide

• Physical damage (PD)
• Loss of production
• BI, CBI, OEE

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Recent Storms to Impact the Offshore GOM

• Plot of maximum windspeeds - 2002 to 2005 Lili,
  Ivan, Katrina Rita

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Recent Storms to Impact the Offshore Region

• 94 of the 4,200 offshore platforms in GOM
  experienced Cat 1 winds or greater from 2002-2005

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Hurricane Losses to Offshore ExposureIvan (04),
Katrina and Rita (05)
Obtained from various industry sources
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Lessons Learned of Relevance to Offshore Energy

• Frequency and intensity of hurricane activity
• Likely to face elevated levels of hurricane
  activity over at least the medium term
• Prior modeling practice, based on long-term
  historical averages, underestimated the
  occurrence of intense storms
• Vulnerability to damage and insured loss
• Physical damageability of platforms (et al)
  greater than previous expectation
• Time element risks are significant, and must be
  modeled
• Greater variability in risk to various classes of
  exposure
• Making the transition from 1st to 2nd generation
  models

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Frequency of Hurricane Activity
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A Conspiracy Between Mother Nature and Developers?
Category 3-5 Atlantic Basin Hurricanes
1901-2005 and 5-year running average
Sustained period in population growth and
economic development of coastal Gulf and SE
regions of the U.S.
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US Landfalling Cat 3-5 Hurricanes
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Tropical Atlantic Sea Surface Temperature
Departures (ºC) During Aug-Oct (1951-2000 Base
Line)
0.8
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
-0.8
1950
1970
1990
1960
1980
2000
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Hurricane Activity on the Rise?

• Named Storms 11 15
  28 13-16
• Hurricanes 6 9
  15 8-10
• Cat 3-5 2 6
  7 4-6
• Cat 5 0.4 1
  4 N/A
• US Hurricanes 1.6 6
  5 88
• US Cat 3-5 0.7 3
  4 81

Initial 06 ForecastVery Active
Average 1950-2005
2004
2005
Other factors, including temporal and geographic
expansion of the basin and sustained intensity
of storm
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NOAA Declares the Onset of an El Niño

• September 10th, 2006

Scientists at the NOAA Climate Prediction Center
reported that El Niño conditions have developed
in the tropical Pacific and are likely to
continue into early 2007Ocean temperatures
increased remarkably in the equatorial Pacific
during the last two weeks. "Currently, weak El
Niño conditions exist, but there is a potential
for this event to strengthen into a moderate
event by winteralso, the development of weak El
Niño conditions helps explain why this Atlantic
hurricane season has been less active than was
previously expected. El Niño typically acts to
suppress hurricane activity by increasing the
vertical wind shear over the Caribbean Sea
region. However, at this time the El Niño
impacts on Atlantic hurricanes are small. We are
still in the peak months of the Atlantic
hurricane season, and conditions remain generally
conducive for hurricane formation.
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Expansion of the Atlantic Basin?
Hurricane Alex (Cat 3) most intense N of 38N Aug
3rd - 5th 2004
Hurricane Wilma (Cat 5) most intense Atlantic
Hurricane 882 mb Oct 18th 25th 2005
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Vigorous Visible Debate on Climate
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Climate Change Debate and Hurricane Activity

• The WMO (World Meteorological Organization) has
  released a statement on the current state of
  debate
• The division in the community is not as to
  whether Global Warming can cause a trend in
  tropical cyclone intensities. Rather it is on
  whether such a signal can be detected in the
  historical data base.
• Whilst the existence of a large multi-decadal
  oscillation in Atlantic tropical cyclones is
  still generally accepted, some scientists believe
  that a trend towards more intense cyclones is
  emerging.
• No single high impact tropical cyclone event of
  2004 and 2005 can be directly attributed to
  global warming, though there may be an impact on
  the group as a whole.
• Prepared by the WMO/CAS Tropical Meteorology
  Research Program, Steering Committee for Project
  TC-2 Scientific Assessment of Climate Change
  Effects on Tropical Cyclones. February 2006

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RMS Expert Elicitation, October 2005
Jim Elsner Professor Florida State
Kerry Emanuel Professor, MIT
Mark Saunders Professor, University College London
Tom Knutson GFDL, NOAA, Princeton, NJ
The Multidecadal Cycle
activity
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Geography of Hurricane Activity IncreaseChanges
in CAT 3-5 Activity vs. 1900-2005
Cat 1-2 21 increase in activity Cat 3-5 36
increase in activity
15 - 20 20 - 30 30 - 45 45
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Vulnerability to Damage and Insured Loss
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Comparison of Industry Platform PD Losses to
Modeled Estimates
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Development of Vulnerability Curves

• Approach
• Analytical damage assessment
• Detailed platform hurricane damage analysis
  reports
• Evaluation of structural response to wind and
  wave action
• Design guidelines
• Detailed analyses of historical claims data
• Vulnerability curves are functions of
• New construction classes
• New year-built ranges
• New occupancy classes

• Modeling of OEE
• Modeling of CBI
• OP specific loss amplification

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New Construction Classes
RiskLink 5.0
RiskLink 6.0

• Jackups
• Caissons/Well Protectors
• Up to 1971
• Post 1971
• Fixed
• Up to 1971
• 1972 1980
• 1981 - 1993
• Post 1993
• TLP/Spar
• Semi-submersibles
• Drillship

• Shallow Water
• Fixed
• Up to 1971
• Post 1971
• Deepwater

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Mobiles
Jackups

• Used for drilling new wells move from location
  to location
• Design Requirements
• 10-Yr API Design
• Wind (1-min) 78 mph
• Significant wave height 26 ft
• Typical damage mechanisms
• Failure of legs and separation of hull

Ocean Warwick after Katrina
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Mobiles
Semi-Submersibles

• Used for drilling new wells move from location
  to location
• Design requirements
• Mooring line design criteria similar to Jackups
• Rig itself designed to more stringent criteria
• Typical damage mechanisms
• Mooring lines break
• Anchors dragged

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Platforms in Shallower Water
Caisson/Well Protector

• Design requirements
• No design guidelines pre-1971
• Typically 100-yr winter storms/sudden hurricanes
• Typical damage mechanisms
• Damage to deck and rails
• Bending of well jacket

MDR
Wind Speed
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Platforms in Shallower Water
Fixed Platforms

• Design requirements
• No design guidelines pre-1971
• Typically 100-yr design criteria
• Further changes in 1980 and 1993
• Typical damage mechanisms
• Wave-in-deck
• Buckling of legs

MDR
Wind Speed
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Platforms in Deeper Water
Drill Ship

• Used for drilling new wells move from location
  to location
• Typically of modest risk since drill ships can be
  moved away from path of inbound storms

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Platforms in Deeper Water
TLP/Spar

• Design requirements
• Stringent design guidelines
• Designed for deeper waters
• Typical damage mechanisms
• Wave-in-deck
• Wind damage to topsides

Damage to Mars during Katrina
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Loss of Production Income (LoPI) Modeling

• Business Interruption (BI)
• Direct physical damage caused to the platform
• Modeled through effective downtime
• Contingent BI (CBI)
• Damage to upstream facilities typically not owned
  by assured
• Pipeline
• Mudslide
• Falling objects such as collapsed platforms
• Anchor drags
• Other platforms that serve as collection/processin
  g hubs
• Damage to onshore facilities

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Business Interruption Modeling

• Downtimes different by water depth
• Smaller platforms in shallower water have smaller
  downtimes
• Deep water platforms have larger downtimes for
  the same platform MDR
• Longer time to survey damage
• Longer repair times
• Examples Medusa spar and Petronius CT requiring
  more than 4 months repair time for low amounts of
  damage
• Occupancy classes to differentiate water depth

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Contingent Business Interruption Modeling

• Triggered by pipeline damage due to
• Mudslide
• Falling objects such as collapsed platforms
• Anchor drags
• Pipeline damage modeled for higher category
  hurricanes
• Identified areas of Gulf most susceptible to
  mudslides

Mudslide susceptibility map from MMS study
Mudslide prone areas of Gulf
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Operators Extra Expense (OEE) Modeling

• Coverage includes
• Control of well
• Redrill costs
• Modeled for
• Caisson/Well Protectors
• Fixed platforms
• Platform needs to be severely damaged/ collapsed
• OEE vulnerability functions based on the
  probability of severe platform damage
• Validated on MMS Well information

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Change in Modeled PD Risk, Industry Aggregate
2006 IED
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Evolution in Re/insurer Modeling and Risk
Management Practice
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Insurance Industry Dynamics in Flux

• Risk increasing (modeled risk, more risks)
• Capital requirements increasing (even for same
  risk)
• Re/insurance rates increasing
• Insurers are taking action to manage their
  exposures
• Insureds retaining more risk
• New capital entering the market, and ART

We remain of the opinion the amount of capital
required by a re/insurer in peak zones will
increase by 50. We believe that demand for
coverage will increase as the new models are
introduced, new PMLs are calculated, and rating
agencies require more capital - Dowling and
Partners
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Integrated Decision Making Under Deep
Uncertainty
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Modeling and Underwriting, Together
The most important factor in improving
underwriting is better information on
risksexecutives say believe that they need more
granular risk assessments than traditional
approaches - Economist Deloitte Insurance
Survey 2003
Whether they misclassify risk or allow risk
pricing to be driven by the market instead of
underwriting discipline...is the fundamental
driver of low returns in this industry -
McKinsey Company, The Journey Revisited 2004
Disciplined underwriting will continue that
highlights exposure data, related loss modeling
and pertinent underwriting information - 2005
Insurance Market Overview
There is one certainty amid all this confusion.
We are in a period of increased frequency and
severity of hurricane activity. The sooner the
industry accepts this and adapts its
underwriting, the better off it will be - 2006
U.S. Insurer, Editorial Page
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We Live in a Quantum World