The Willis Research Network - the world's most important hazard and risk collaboration?

Willis is a large insurance and reinsurance broker based in London. A key part of their primary business lies in arranging insurance for catastrophe risk - i.e. losses from mega-events such as an earthquake in Tokyo or San Francisco, a storm surge flood in London or a volcanic eruption near to Mexico City. Calculating the risks associated with these events is a challenging task, but of course the stakes are high as large events can induce catastrophic losses. Parts of the reinsurance industry was badly burnt by Hurricane Katrina for example. So, in order to calculate the risks and potential losses reinsurance companies use Catastrophe Models (usually called Cat Models), which are complex simulations of the impacts of large events. Getting these models to sensibly estimate potential losses is difficult - and of course requires a good knowledge of the science of the hazard in question.

A few years ago Willis approached one of my colleagues, Prof. Stuart Lane, and I to see if we would be interested in joining a research network that Willis would support. The idea was to bring together key parts of the reinsurance industry and top academic researchers on hazards and risk in order to improve the ways in which risk is modelled and handled in the insurance industry. And so the Willis Research Network was born. Initially the network consisted of seven very carefully chosen UK academic institutions - Durham, Bristol, Reading, City, Cambridge, Exeter and Imperial. Membership of the network is by invitation only, and active participation is ensured through the sponsorship by Willis of a research fellow in each institution.

A few years on, and the network is now an extraordinary entity. That initial group of seven has been joined by universities from the USA (e.g. Princeton and NCAR), Japan (e.g. Kyoto), Italy (e.g. Bologna), Germany (e.g. GFZ Potsdam) and Australia (e.g. SEA). I am pretty sure that it is now the largest and most dynamic academic-industrial hazard and risk network in the world, and it is generating some amazing research.

In the last couple of days the network announced associate membership of ten new institutions, including the British Geological Survey, the UK Met Office, The UK National Oceanography Centre, the Ordnance Survey and GNS Science in New Zealand. Research now spans natural perils, visualisation, social dislocation and financial management. I suspect that over the next few years this network will come to dominate research into catastrophic risk management. The publications section is well worth a look, not least because there are some very useful background presentations there from some of the world's top hazards researchers.

Losses in catastrophes in 2008 - initial statistics from Swiss Re

Tropical Cyclone Nargis montage from the Brisbane Times

Swiss Re Sigma has just released its initial statistics on losses in catastrophes in 2008. Of course it is important to understand that reinsurance look at catastrophes in a particular way, meaning that the statistics are weighted in particular to low frequency - high magnitude events, rather than iterative processes, and to losses causing a high level of financial loss. There is no problem with this of course, but it is important to keep it in mind.

So what do the statistics show? Unfortunately the picture is pretty grim. Swiss Re estimate that these large loss events cost over 238,000 lives, most notably as a result of tropical cyclone Nargis in Burma (Myanmar), which led to 138,400 fatalities, and the Wenchuan (Sichuan) earthquake, which killed 87,400 people. In terms of economic losses, Swiss Re estimate that catastrophes cost about US$225 billion in 2008, of which about $50 billion was insured. The greatest costs were from the Wenchuan earthquake ($85 billion) and Hurricane Ike (USA) ($40 billion).

All in all 2008 has been the second worse year for insured losses on record (2005 was the worse because of Hurricane Katrina). I guess that this is unwelcome given the global financial malaise.

I have to say though that for me perhaps the interesting aspect is the following graph within the report (download a hard copy of the report here):

So let's take a quick look at the recent trends. First, the palest blue line is the total insured losses. There is a huge amount of scatter from year to year, but the general trend is clearly upwards. However, the other two losses show that this increase arises primarily from the weather related perils (the darker blue line). Over the last decade there is no obvious trend in losses from man-made disasters, with a single obvious peak in 2001 - no prizes for guessing the cause of that. Note also that very large-scale earthquake losses to the insurance industry are comparatively rare - most earthquakes occur in areas that have very low levels of insurance cover. Thus the 2005 Kashmir earthquake and the 2008 Wenchuan earthquake hardly appear on the above graph.

The trends in losses interests me greatly. I wanted to check that there is a net increasing trend in losses from weather-related perils. A quick, back of the envelope graph shows that there is indeed a clear upward trend:


I fitted a fairly simple exponential function above, although it may not necessarily be the best choice. There is a very clear upward trend in insured losses from natural perils. This rise in economic losses from natural perils is generally ascribed to increasing vulnerability - i.e. we have more economic assets in the "firing line". However, note that insured losses from man-made perils are not following the same trend. Presumably, this is also the case for man-made perils, but in this case the improvement in management and control is keeping track.

I will return to these data in the future.