First marine catastrophe model to encourage ILS participation: RMS

The forthcoming launch of the first marine cargo and specie catastrophe risk model from RMS will provide an enhanced approach to marine risk quantification, helping ILS investors and capital to increase participation in the marine insurance and reinsurance market.

The RMS Marine Cargo Model, which will be the insurance and reinsurance industry’s first marine cargo and specie catastrophe risk model, is due to launch in May 2016.

Risk modelling specialist RMS partnered with some of the world’s leading marine re/insurers to develop the new risk model, with Chubb, Aon Benfield, AXIS, Liberty, MS Amlin, Munich Re, and Sompo Canopius AG all supporting the effort.

Of course marine risks are increasingly becoming a feature of the insurance-linked securities (ILS) space, with a number of the larger ILS fund managers underwriting these specialty type reinsurance risks as additions to their portfolios and funds.

As a result, enhancements and developments in modelling marine cargo catastrophe risks, which is one area the ILS market shows definite and growing interest in, could help to stimulate further deployment of alternative reinsurance capital and enable other ILS fund managers to target the marine class of business.

Recent events such as the Tianjin port explosions, thought to have caused an insurance and reinsurance industry loss of anywhere up to $6 billion, with most estimates seeming to converge at above the $3.5 billion mark, demonstrate the need and opportunity for risk capital in the marine market.

Tianjin also demonstrates that some ILS fund managers are already allocating capital to the marine class of business, as a number established side-pockets for the Tianjin blasts as losses developed.

RMS believes that its new marine cargo risk model will help ILS players and insurance-linked investors to increasingly become comfortable with allocating capital to and investing in marine insurance and reinsurance risks.

Chris Folkman, director, product management at RMS, described the market need for a marine cargo catastrophe risk model.

“Global sea-based trade tonnage nearly quadrupled between 1970 and 2010,” he explained. “With higher cargo volumes, larger ships, growing ports, and increasingly efficient terminal operations, exposures at risk are a growing concern. (Re)insurers need to have a better grasp of their cargo catastrophe risk and how it correlates with other lines of business. They simply cannot continue to use the outdated methods currently available to them.”

RMS published a report titled “Marine Cargo Catastrophe Modeling: Navigating the Challenges, Charting the Opportunities” which is intended to raise the marine re/insurance sector’s awareness to the risk of catastrophic loss, improve risk management practices, and help it to develop new financial and risk transfer products, to precede the release of the RMS Marine Cargo Model in May.

Marek Shafer, Head of Catastrophe Management at insurer Sompo Canopius, said that a new approach to this risk is needed; “Recent significant losses in the marine market have reinforced Sompo Canopius’s belief that the approach to catastrophe management should be holistic across our group. The practice of square pegging marine exposure into the round holes of property catastrophe risk models is recognized as inappropriate. A new approach is needed to align these correlated classes and our collaboration with RMS represents a key step on this journey.”

RMS told Artemis that the marine cargo industry’s exposure base has risen to a staggering $10 trillion, with global cargo throughput growing by almost 400% since 1970.

The new RMS Marine Cargo Risk Model will assist re/insurers and ILS players to improve their views of marine risk, by providing cargo specific vulnerability information, differentiating between types of cargo for the first time, as well as providing industry exposure databases (IED’s) quantifying average and peak exposure in key global ports at high-resolution.

The IED’s also take into account thousands of storage structures, their elevations, and their likely exposure, all vital to gaining a robust view of the risk as was evidenced in the uncertainty surrounding the Tianjin port loss.

At launch the IED will cover 11 of the world’s largest and most strategically important ports (Shanghai, Tokyo, Hong Kong, New York/New Jersey, Los Angeles, Long Beach, Savannah, Houston, Hamburg, Rotterdam & Antwerp).

The result of the enhanced granularity of data, access to exposure information and ability to model marine risks, will be better risk quantification. RMS expects that this enhanced approach to marine risk modelling will “lead to more risk transfer and transparency on risk pricing, leading to more efficient contracts for ILS participation and growth.”

As a result, ILS funds will be able to demonstrate to investors and clients a greater confidence in their ability to underwrite marine cargo risks, with the risk modelling methodology underpinning their decisions to allocate capital.

Additionally, RMS said that it will now be able to quantify marine risk that has previously been classed as an unmodelled risk in indemnity transactions, which it says will lead to tighter execution of contracts. This could also be beneficial in the catastrophe bond market, as there have been transactions in the past where some marine risk exposure from catastrophe events has been covered.

Chris Folkman explained why marine risks are unique and how the ILS market can capitalise on the enhanced risk modelling technology to increase its participation in this space.

“Marine risks are unique. Their vulnerability depends on complex variables such as salvage value, protection, and packaging. But they can be made more palatable to capital market investors through better risk quantification. Capital markets investors expect a clear view of risk based on quality data and granular modelling.

“A more accurate assessment of marine risk can be provided through modelling cargo specific vulnerability (for example, electronics in containers from oil in tanks rather than classifying all cargo as the same “contents” exposure) and more detail on the exposures in key global ports. This can be found in RMS’ latest report which was designed to help improve marine risk management practices. The approach in the report sets out how previously unmodeled risks can be modeled and transferred to the capital markets.

“This will drive the continued expansion of the ILS market in marine as ILS funds can now demonstrate greater confidence in their ability to underwrite risks as a result of robust modelling methodologies to their stakeholders.”

As risk models improve, data becomes more abundant and methodologies for assessing and quantifying specialty classes of risk, such as marine, improve, the ILS market and its investors stands to benefit through an increasing ability to participate.