Catastrophe Risk Financing

Catastrophes arise when extreme events impact adversely on society, typically leading to death, injury, destruction of infrastructure and a wide range of indirect effects such as epidemics, migration and poverty.

The negative socio-economic impacts that result from catastrophes require significant financial assistance, coordination of emergency relief and redevelopment of infrastructure over subsequent years.

Earthquakes, tsunamis, windstorms and floods have been responsible for the majority of catastrophes. During the last decade, the average number of natural catastrophes with significant losses was 770 per annum.

Each year, these catastrophes killed 75,000 people and resulted in economic losses of £72bn ($115bn) and direct insured losses of £22bn ($36bn) on average.

There has been an upward trend in both the frequency and severity of natural catastrophes and scientific evidence is increasingly suggesting that climate change may worsen weather-related catastrophes, particularly in developing countries where insurance protection is scarce.

The research

The Catastrophe Risk Financing research area will develop effective and sustainable strategies for managing risk and sharing the costs of catastrophic events using a multidisciplinary approach that bridges academia, government and the private sector. This research is led by Dr Patrick McSharry and hosts the Willis Research Fellow.

The research objectives are:

• Provide a transparent framework for quantifying, pricing, sharing and financing catastrophe risk on a local and global basis
• Study existing public/private partnerships and establish guidelines for sharing catastrophe risk equitably and sustainably across society
• Demonstrate and communicate the direct economic benefits gained from developing mechanisms to protect against natural catastrophes
• Investigate the mechanisms available for transferring risk within both financial and insurance markets
• Promote a multidisciplinary approach to catastrophe risk financing through the integration of science, finance and insurance.

Projects

• Communication and quantification of risk using quantitative modeling approaches such as numerical weather prediction, climate models and catastrophe models in collaboration with Rowan Douglas and Matthew Foote of centre sponsor, Willis Re.
• Analysis of operational efficiency and improved decision-making gained from probabilistic forecasting of wind power generation. Collaboration with Pierre Pinson of the European Centre for Medium-Range Weather Forecasts (ECMWF) and participation in the EU FP7 funded SafeWind project.
• Development of a socio-economic impact module for the Global Earthquake Model (GEM), which was initiated by the OECD. GEM aims to become the independent standard to calculate and communicate earthquake risk worldwide.
• A joint project with Helen Galy and Jürgen Gaiser-Porter of Willis Re, investigating the advantages of parallel computing for reinsurance and catastrophe models. This project is supported by NERC, Willis and the Smith Institute through a KTN Industrial Mathematics Internship award, which is held by Shilan Mistry.
• Collaboration with James Vickers, Andrew Mitchell and Rebecca Anderson of Willis Re, investigating how to communicate the direct economic benefits gained from developing public/private mechanisms to protect against catastrophes.
• A study of private/public partnerships such as the Turkish Catastrophe Insurance Pool and the Caribbean Catastrophe Risk Insurance Facility (CCRIF) is been undertaken through collaboration with Francis Ghesquiere and Leonardo Garrido of the World Bank.
• The centre will work with the World Forum of Catastrophe Programmes (WFCP) in order to stimulate new multidisciplinary science that is timely and relevant to issues facing the members of the forum. Collaboration with David Middleton, Chairman of the WFCP, will provide significant input for producing effective guidelines for constructing natural catastrophe schemes such as those described by the Spanish Consorcio de Compensación de Seguros.

Willis Re

This research is sponsored by the Willis Research Network (WRN), part of Willis Group Holdings Limited, the global insurance broker. It will build on considerable expertise in the WRN for quantifying the severity, frequency and impact of losses arising from natural catastrophes.