Tokyo CAT models: Is anything missing?

Earthquake and tropical storms may be the most focused on perils in Japan, but Swiss Re’s underwriters warn that a closer look at all perils, including floods, is warranted

Japan, especially Tokyo, have become the focal point of some of the world’s most sophisticated natural catastrophe (NatCat) models, with its wind and earthquake exposures. Earthquake and tropical storms are the most focused on perils, but Swiss Re’s underwriters suspect there might be an iceberg lurking under the surface, and this will warrant a closer investigation. Atsuhiro Dodo and Luke Johnston, both Vice Presidents, Property & Specialty Underwriting, say it is important to ensure that the potential of a large scale Tokyo flood is properly understood.

After the flooding of New Orleans during hurricane Katrina in 2005, the potential for a large scale Tokyo flood due to severe rainfall and/or storm surge quickly became both a public issue in Japan and also a topic for further investigation within Swiss Re. From a reinsurance perspective, we deem an ‘unpleasant surprise’ as having a loss that had not been considered during the technical costing process, and hence it was important to ensure that the potential of a large scale Tokyo flood was being properly considered and understood.

In the absence of probabilistic model availability, we must rely on good old fashioned underwriting skills to determine expected losses for non-modeled perils. Probabilistic models

rely on a four-box approach where Hazard, Vulnerability, Exposure, and Policy Terms and Conditions are all considered. Once we have a reasonable grasp of the above issues, we will be in a position to start constructing a loss frequency curve to allow for technical costing of the flood only component in any treaty. We then need to wean out the ‘pure rainfall’ events to avoid overestimating the loss potential.

Reinsurers need to beware of major peril reserves being eaten away by secondary perils that may not have been adequately accounted for. It is in this sense important to ensure that the potential of a large scale Tokyo flood is properly understood, and to start considering missing pieces in our costing Tokyo flood to avoid any unpleasant surprises.

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