A demonstration tsunami catastrophe risk model for the insurance industry

Catastrophe risk models ("Cat models") are important tools used by the insurance industry to quantify risks associated with a wide variety of insurance and reinsurance products. The market for Cat models is approximately £400m globally. It is growing as the new EU regulatory framework for the insurance industry (Solvency II) requires insurance companies to display a quantitative understanding of the risks resulting from their sales of insurance products, including an understanding of the uncertainties in the Cat models that they use to assess these risks. At present almost all Cat models are commercial-in-confidence products from 3 companies. A need for more diverse Cat models and open model design is reflected in insurance industry support for the Oasis Loss Modelling Framework for open and transparent catastrophe risk modelling. Oasis is designed to combine hazard model and vulnerability model modules, built by external experts, with standard modules for inputting exposure data and carrying out financial calculations, to produce new, well-validated and Solvency-II compliant Cat models. Furthermore, recent tsunami disasters, most notably the Tohoku 2011 tsunami, have highlighted both the large potential losses to which the insurance industry is exposed in important tsunami-prone regions such as Japan and Cascadia (NW United States of America and Pacific Canada), and the lack of available scientifically sound tsunami Cat models.

This application builds upon (i) our existing research on tsunami wave physics models, especially on the rigorous quantification of uncertainties in their outputs using statistical emulation methods, and (ii) an existing proof-of-concept investigation of how to produce tsunami hazard maps, compatible with the Oasis framework, from the advanced tsunami wave physics model VOLNA. We will do this by producing a working tsunami hazard model for the Cascadia region, and a simple empirical tsunami vulnerability model for common building types. These will be combined with Oasis' exposure and financial calculation modules to produce a demonstration tsunami Cat model for Cascadia in a form suitable to be used, at least for test and validation purposes, by the Oasis partner companies in the insurance industry.

Our Cascadia tsunami hazard model will be the primary product of the project. Its objectives are:
1. To define, using published geological evidence, the range of possible subduction zone earthquake sources (shapes, kinematics of the ruptures) in Cascadia, and their occurrences.
2. To build a tsunami hazard model for Cascadia with runs from the tsunami model VOLNA as well as the computationally efficient statistical representation of VOLNA to cover the ranges of possible outputs that result from the range of possible earthquake sources. These VOLNA runs will be designed using state-of-the-art design of experiments methods.
3. To construct vulnerability curves for buildings that reflect published evidence derived from damage surveys after recent major tsunamis.
4. To embed these hazard and vulnerability modules into the Catastrophe modelling platform from the Oasis Loss Modelling Framework. To calculate loss exceedance probability curves for synthetic and given portfolios.
5. To propagate the uncertainties in 1-3 into the loss calculations in step 4.
6. To provide model & user documentations to enable uptake of the model by the Insurance Industry partners of Oasis.

The anticipated outputs from this Follow on Fund project are highly timely as they would address two key problems that need to be resolved by and for the insurance industry:

1. Improved Cat model transparency: Catastrophe (Cat) modelling is the process of using computer-assisted calculations to estimate the losses that could be sustained due to a catastrophic event such as a hurricane, earthquake or tsunami. These models have historically been proprietary or 'black box' solutions whose operations and underlying models were not visible to insurance industry subscribers. However from January 2013, the new EU Solvency II regulations have required insurance companies to display a quantitative understanding of the risks to which they are exposed by their sales of insurance products, including an understanding of the uncertainties that propagate through the models and into the results. As a result, there has been pressure from the insurance industry for the development of more transparent or 'open' Cat models that would allow greater transparency in risk modelling and loss-estimation.

2. Greater Cat modelling accuracy: From a risk management perspective, recent tsunami disasters, most notably the Tohoku 2011 earthquake-generated tsunami, have highlighted the large potential losses to which the insurance industry is exposed in important tsunami-prone regions such as Japan and Cascadia (NW United States of America and Pacific Canada). To date, no scientifically based tsunami-specific catastrophe risk models have been made available to the insurance industry. The Tohoku tsunami has brought home to the insurance industry the importance of accurate and reliable tsunami risk modelling to estimate catastrophe exposures to future similar disasters, and therefore the consequences for the UK insurance industry.

The proposed project will result in a demonstration tsunami catastrophe model for the Cascadia region, with novel features that will address these two problems, respectively:

1. It will be the first Cat model for any hazard that will make use of statistical emulation and advanced design of experiment techniques for transparent uncertainty quantification and analysis.

2. It will be the first such model with a scientific basis in geological, wave physics and engineering models of tsunami generation, propagation and impact to be made available to the insurance industry.

As a result, it will deliver a step-change in accuracy and reliability of tsunami hazard modelling and loss estimation for the insurance industry, and thereby generate substantial benefits across the industry through improved understanding and pricing of risk arising from tsunami events. Importantly, by linking into the OASIS 'Open-Cat' framework, the project outcomes will also be disseminated in a manner that will facilitate greater understanding of hazard and loss modelling across the industry. This will provide further up-skilling of the Insurance Industry workforce and enable organisations across the insurance value chain to fulfil their obligations under Solvency II. Finally, this dissemination process will help to ensure that, once a tsunami catastrophe model has been developed and proven for one region, industrial support for development of tsunami cat models for other regions will be more easily gained in the future.