Measuring and predicting Catastrophes

Putting Recent Catastrophe Losses in Perspective

The natural catastrophes of 2011, including the Tohoku earthquake in Japanflooding in Thailand, earthquakes in New Zealand, and floods in Australia, resulted in $110 billion in insured losses making it the second-highest figure ever recorded from global natural catastrophes, according to Swiss Re.

A new report from AIR, a worldwide catastrophe modelling firm, explains that there is almost a one in thirteen chance that the global insurance industry will experience this sort of size loss level or even greater each year from now on.

AIR’s report also examines scenarios that could result in much larger worldwide insurance losses.

For example, AIR estimates that the 100-year return period loss is just over $200 billion — a figure that could be reached with a severe U.S. hurricane season or by a combination of different perils in different regions, as was the case in 2011.

AIR estimates the average annual loss (AAL) from natural catastrophes is $59 billion, in line with global catastrophes losses from 2012, which are estimated to be around $58 billion. Those estimates are based on perils and regions currently modelled by AIR.

AIR’s models incorporate years with losses much greater than what we experienced in 2011. There is real value of having a credible catastrophe model. They can fully anticipate possible outcomes, including future catastrophes and future years that will produce losses exceeding any historical amounts.

Despite the significance of the amount for 2011, insured losses fell well within the range for which global insurers and reinsurers should be prepared. AIR hopes that the report will help companies increasingly concerned about escalating levels of loss to better understand and own their risk.

The events of 2011 has prompted the insurance industry to consider some basic questions, which AIR’s new report explores, such as: “How frequent are loss years like 2011? And “are natural catastrophe events becoming more frequent and/or more severe?”

AIR is in a unique position to provide guidance with respect to those questions and believes the industry would benefit by sharing such pertinent loss information.

AIR develops and maintains detailed databases of insured properties for each modelled country. The databases serve as the foundation for all modelled industry loss estimates. Second, AIR takes a unique approach to generating the catalogs of simulated events in its software that makes it easy for the user to determine the probability of various levels of loss for individual events, such as the Tohoku earthquake, or for whole years of catastrophe activity. Finally, AIR models the risk from natural catastrophes in more than 90 countries, which gives it a global perspective. For example, AIR models covered perils and regions accounting for more than 80 percent of insured losses from natural catastrophes worldwide in 2011.

AIR’s approach of simulating potential years of activity has long enabled companies to look at their global risk on an aggregate basis. A full version of this report can be found on AIR Worldwide’s at: Taking-A-Comprehensive-View-of-Catastrophe-Risk-Worldwide

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