Catastrophe Modeling For Specialized Risks

Models estimate losses for glass and other building components, as well as high-value properties

Insurers of property lines have long benefited from the robust, objective results provided by catastrophe models. However, it hasn't been until recently that specialty insurers have benefited from advanced catastrophe risk assessment designed for their unique risks.

In the past, coverage for specialized risks was often based purely on the experience of individual insurers. Now, models have been developed for a wide variety of unique structures--e.g., wireless communication towers and nuclear power plant cooling towers--and even individual building components, such as plate glass.

A lack of understanding of potential losses for specialized risks can be costly to both the insured and the insurer. Specialized risk models enable underwriters to generate objective, scientifically-based loss estimates for these exposures, as well as analyze the potential impact on their portfolios. In addition, these models enable insurers and property owners alike to assess the impact of a variety of loss prevention and mitigation measures, assess potential business interruption losses, and evaluate the life-safety qualities of structures.

Modeling Specialized Risks

Because robust data on the performance of specialized risks under extreme loads is typically scarce, developing a model for such risks is best accomplished using an approach called the Advanced Component Method, which starts with a detailed engineering-based analysis of the structure or components to be analyzed.

Engineers evaluate blueprints and engineering plans, and "decompose" a building into its component parts (beams, columns, joints, partitions, cladding, glazing, etc.) in order to estimate physical damage at the component level. The repair costs of individual components are then combined to achieve an estimate of the monetary damage to the building as a whole. Estimates of insured loss are then calculated by applying policy conditions.

Glass Breakage

Although glazing is generally the first point of failure in the building envelope during a hurricane, property owners seeking glass insurance face the difficulty that standard insurance policies typically exclude or severely limit coverage for glass breakage experienced during a hurricane. While recent hurricane activity has generated considerable interest in insurance coverage for this specialized risk, it has not until now received significant attention from the modeling community.

For specialty insurers offering policies for commercial glass, condominiums and hotels, older generalized property models to predict hurricane losses for exterior glass may overestimate those losses. One of the reasons that such generalized models produce estimates that are too high is because glass does not cost as much to replace as the general wall and roof structures considered in such models.

A consequence of this overestimation is that the specialty insurer may be prompted to buy more reinsurance than necessary.

A newer type of specialized model--a plate glass-specific model--uses a load-resistance approach for estimating the vulnerability of glass. The effects of wind pressure and windborne debris, as well as the resistance of various types of glass are modeled probabilistically based on established building standards, such as those of the American Society of Testing and Materials and the American Society of Structural Engineers.

Using such a glass-specific model, a specialty insurer found that its glass-only losses were just 60 percent of the total losses projected by a general catastrophe model. And the improved detail in the glass-specific model armed the company with scientifically grounded data to use in discussions with its reinsurers, thereby enabling it to reduce its reinsurance costs.

Managing Risk for High-Value Buildings

Insurers of prominent, high value or strategically significant facilities have a lot riding on the adequacy of the design and engineering of the building. In addition, building owners need to understand the potential hazards and vulnerability of their specific properties to safeguard occupants and minimize interruption to operations.

A detailed catastrophe risk assessment, which combines elements of catastrophe modeling and traditional probable-maximum-loss analyses, is the best method to provide both insurers and owners of high value properties with the information necessary to make a wide variety of mission-critical risk management decisions.

To quantify the structural vulnerability of the structure, the assessment begins with an on-site engineering analysis that, combined with blueprints and building specifications, is turned into detailed digital two-dimensional and three-dimensional computer models. The "virtual" structure is then subjected to the full range of conditions that extreme events would generate--such as severe ground motion, extreme winds, or even the shock and pressure waves from explosives.

Simulating the effects of a wide range of potential events on a computer model of the specific building yields a more detailed understanding of potential losses. A distribution of losses is developed, along with the probability that each level of loss dollars will be exceeded. The results of these highly detailed, highly customized analyses enable proactive decision-making and strategic planning, and are an essential component of a robust enterprisewide risk management approach.

Conclusion

Accurate models and software solutions are now available that take the guesswork out of pricing specialized risks.

Using this approach, which can be applied to virtually any risk exposed to catastrophes, insurers and their clients can be more confident that sound risk management decisions are being made on the basis of objective, reliable model results.

Frank Fischer is a client relations manager at AIR Worldwide Corporation. Based out of AIR's Boston headquarters, Mr. Fischer is responsible for providing support and service to primary insurance companies.


Art Caption:

Using a glass-specific model, a specialty insurer found that its glass-only losses were just 60 percent of the total hurricane losses projected by a general catastrophe model.

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