Global catastrophic risks are risks that seriously threaten human well-being on a global scale. An immensely diverse collection of events could constitute global catastrophes: potential factors range from volcanic eruptions to epidemic infections, nuclear accidents to worldwide tyrannies, out-of-control scientific experiments to climatic changes, and cosmic hazards to economic collapse. This paper outlines how catastrophe exposures place special demands on insurer capitalization and require a distinct risk management approach. The interaction or co-variance (versus independence) of the various risks, a company faces, is an important factor in determining the company’s total capital requirements.

1. www.niit-tech.com
Catastrophe Exposure Management
NIIT Technologies White Paper

2. CONTENTS
Introduction
3
Data Warehousing for Insurance Industry
3
How it impacts insurers?
3
How Natural Catastrophe Risks are managed by insurers?
4
Catastrophe Loss;A look at the statistics
5
Catastrophic Risks: Choosing the right tool
6
Conclusion
6
How companies can be benefited from ‘Exact’
6

3. Introduction
How it impacts insurers?
Global catastrophic risks are risks that seriously threaten human
Catastrophe exposures place special demands on insurer capital-
well-being on a global scale. An immensely diverse collection of
ization and require a distinct risk management approach. The
events could constitute global catastrophes: potential factors range
interaction or covariance (versus independence) of the various risks,
from volcanic eruptions to epidemic infections, nuclear accidents to
a company faces, is an important factor in determining the
worldwide tyrannies, out-of-control scientific experiments to climatic
company’s total capital requirements.
changes, and cosmic hazards to economic collapse.
Catastrophes represent significant financial hazards to an insurer,
The tipping point: Katrina exposes a new trend
including the risk of insolvency, an immediate reduction in earnings
We live in a world that is increasingly uncertain. For the first time in
and statutory surplus, the possibility of forced asset liquidation to
history humans dominate the planet and yet, paradoxically, the
meet cash needs, and the risk of a ratings downgrade.
success of globalization has increased the risks we face.
For property and casualty insurers, catastrophes are defined as
Nature has raised the stakes. In 2004 a record number of hurricanes
infrequent events that cause severe loss, injury, or property damage
and typhoons struck Florida and Japan. In 2006, Katrina and Rita
to a large population of exposures.
delivered a one-two punch to New Orleans and Texas, tragically
destroying thousands of lives and causing up to $400 billion in
Whereas most property insurance claims are fairly predictable and
property losses.
independent, catastrophe events are infrequent and claims for a
given event are correlated. The insurance process, if left unmonitored during lengthy catastrophe-free intervals, could produce
increasing concentrations of catastrophe exposure.
Challenges faced by insurance industry
Catastrophe exposures broadly impact the insurance industry and
present the following challenges:
• Identifying catastrophe risk appetite
• Measuring catastrophe exposure
• Pricing for catastrophe exposure
• Controlling catastrophe exposure
While people watch TV screens in shock and disbelief, scientists
• Evaluating ability to pay catastrophe losses
forecast a new global trend. Hurricanes that could impact the US are
increasing in strength and frequency. Many believe that we are
entering a new geological cycle and that the increased storm volatility
is caused by the warming of the seas, part of an overall pattern of
global warming. We may need to brace ourselves for several decades
of more frequent and intense floods, hurricanes and typhoons. We
need to prepare for an increasingly dangerous physical environment,
and we need to do that fast.
How Natural Catastrophe Risks
are managed by insurers?
Accumulation Control
• Commercial Earthquake
- Earthquake coverage is only given as an extension of thestandard policy.
3

4. - The number of policies is limited.
• Current approach – “Probabilistic”
- Control of accumulation is relatively easy.
- The computer simulation of all the possible losses
- Accumulation per Zone is monitored and controlled in day today
that couldhappen within a long period of time.
underwriting.
- This type of model also makes it possible to understand therelationship between loss potential and
Wind /Flood
occurrence frequency.Insurers are increasingly using
- Wind cover is basically provided in all fire policies.
these models.Some have in-house models. Some
- Flood cover is basically provided in all comprehensive
depend on professionalcompanies.
firepolicies.
Fixing Retention Level
Decision making factors
- The number of policies is enormous.
- Daily monitoring and control of accumulation is rather
Cost of
Reinsurance
Overall
Decision
Impact on PL
Risk Profile
difficult.
Capital Strength
- To grasp and control actual accumulation is essential,
but toarrive at more realistic and meaningful assess-
- Management is fully involved in the decision process,
ment of theirfinancial risk involved, they need to use
because how much they can/should retain those
some other tools.
largest risks is one of the most significant issues.
Assessment of Maximum Possible Loss (MPL)
- Some insurers have their own model for the simula-
• Traditional approach - “As if”
tion of their optimum retention.
- To estimate MPL based on the past records.
- Applying past losses to the insured values that exist
now.
Catastrophe Loss;
A look at the statistics
- Good to know a single, simple, individual loss.
Significant natural catastrophes worldwide 2011
Month
Event
Country
Overall losses
Insured
losses
US$m original values
Fatalities
2,10,000
35,00040,000
15,840
Thailand
40,000
10,000
813
Earthquake
New Zealand
16,000
13,000
185
April
Severe Storms,
tornadoes
USA
15,000
7,300
350
May
Severe Storms,
tornadoes
USA
14,000
6,900
178
Jan-Dec
Drought
USA
8,000
2,400
August-September
Hurricane
USA, Canada
7,400
5,600
55
April-May
Floods
USA
4,600
50
9
April
Severe Storms,
tornadoes
USA
3,500
2,000
9
January
Floods
Australia
2,800
1,875
22
March
Earthquake, Tsunami
Japan
August - November
Floods
February
Source: Munich Re
4

5. Insured catastrophe losses in the first half of 2012 came to
Around the world, major earthquakes struck in Italy, the Philippines,
$12bn, out of $26bn economic losses, according to the world’s
Iran, and Afghanistan. The Philippines were also slammed by
largest reinsurer Munich Re. This compares with a long-term, or
Typhoon Bopha, which claimed over 1,000 lives and left many
10-year, average (LTA) insured loss of $19.2bn and an economic
more homeless.
loss of $75.6bn.
While global economic losses were close to average in 2012,
insured losses last year were 36 percent higher than the 10 year
average ($72 billion vs. $53 billion) because the two most costly
events of the year occurred in the U.S., which has higher than
average insurance penetration.
The two major U.S. natural peril events, Hurricane Sandy and a
year-long drought, accounted for two-thirds of all 2012 insurance
losses globally and nearly half of all economic losses for the year,
according to The Annual Global Climate and Catastrophe Report.
Modenesi's Towers of Finale Emilia are destroyed following an
earthquake on May 20, 2012 in Ferrara, Italy
• Despite a relatively quiet year for tornadoes, insured losses from
This Oct. 31, 2012 file aerial photo shows the damage to an
amusement park left in the wake of Super storm Sandy, in Seaside
thunderstorm events exceeded $14 billion, the second highest
annual total on record.
Heights, N.J. (AP Photo/Mike Groll, File)
• Severe drought cripples agriculture over large section of central
2012 saw many natural disasters strike across the globe, killing
United States.
thousands and inflicting billions of dollars in property and
infrastructural damage. From hurricanes and earthquakes to
droughts, heat waves and wildfires, events were both widespread
• Dry conditions lead to the most damaging wildfires in Colorado
history.
and severe.
5

6. Catastrophic Risks:
Choosing the right tool
The extent to which companies need to prepareeffectively for
catastrophe will depend on theirresources, size, industry and the level
of risk that theyface. Heavily regulated industries, such as
With advances in computer technology, new quantitative tools have
financialservices, or those that operate in regions of highseismic activity
been developed to helpmanage catastrophic risk. Geographic
or terrorist threat, will undoubtedlyneed to put in place more
information systems have allowed companies toresurrect the “pin
sophisticated plans. Such preparations need not be expensive or
maps”, with significant additional abilities. But, well beyond merely
time-consuming—even straightforward precautions, suchas backing
looking atexposures, catastrophe simulation models have given us
up all data to a remote site on a daily basisand putting in place policies
the ability to estimate potential lossesin a way that truly reflects the
for employees in theevent of a catastrophe, could make the
long term frequency and severity distributions.
differencebetween survival and extinction.
Models can have deterministic and/or probabilistic approaches.
As the level and variety of threats that companiesface increases, they
Deterministic modelling is the simulation of specific events, either
are likely to face greater pressurefrom external sources, such as
historical or hypothetical, which are pertinent to theportfolio under
regulators, customersand shareholders, to put in place good
study. This can be helpful for validating model results, or for providing
catastrophe riskmanagement. Executives who have ensured that
anestimate for a certain event which concerns management.
theircompany has robust plans in place will not only bewell prepared for
a range of eventualities, but will alsodemonstrate to the broader
However, probabilistic modelling has the potential to provide much
stakeholder communitythat they take seriously their responsibility
more information tomanagement. In this method, the modeller runs
forprotecting the organisation over the long term.
a large library of hypothetical events thatcovers the range of
potential events. From the results of all of these simulations, the
modellercan estimate the probabilities of various levels of loss to the
its exposure portfolio and determine reinsurancedecisions by
How companies can be benefited
from ‘Exact’
comparing the potential losses with the company’s appetite for risk.
Risk assessment software from NITL is used extensively by
company (i.e., loss likelihood).This allows the company to manage
underwriters and captive insurers of location-based assets in the
Lloyd's and Companies markets to effectively manage their risk
Catastrophe Loss;
A look at the statistics
It is impossible for companies to consider every eventuality that they
could face in the future, andmany of the incidents for which they do
preparemay never happen. But despite this, companies wouldbe
foolish to ignore catastrophe risk managementon the grounds that
such incidents are eitherunforeseeable or too remote. Many of the
precautionsthat companies need to put in place to deal
withcatastrophe are generic and would apply in the caseof any
exposure aggregations globally for all major classes of business.
A key decision-making tool, Exact Advantage offers advanced
aggregation capabilities enabling insurers to effectively monitor
exposure to help analyse the levels of risk against a variety of live,
historic and "what-if" natural and man-made disaster scenarios, such
as hurricanes, earthquakes, terrorist attacks and floods.
Exact Advantage aids the underwriting evaluation process, for planning
and arranging outward reinsurance protections and for completion of
regulatory requirements, i.e. Lloyd's Realistic Disaster Scenarios.
major incident.
Exact Advantage has the flexibility to support complex reporting based
For example, employees andassets must be protected, IT
on geographic location, the peril and class of business, the policy limit
infrastructure and otheroperations must be restored, and reputation
and deductibles and is used for all major classes of business including
mustbe maintained using open, constant communicationwith
Property & Casualty, Onshore Energy, Offshore Energy and Terrorism.
customers, investors and the media. As such, companies should not
necessarily focus on specificthreats but rather on the general
The perfect storm for insurers - underwriters, regulators and
decision-makingstructures, roles and responsibilities, and prioritiesthat
investors - require greater understanding of risk with transparency of
they would need to set for any major incident.
reporting but catastrophes worldwide, cat model challenges (lack of
coverage, unreliable, black box), variable quality of risk data hinder
accurate forecasting.
6

7. About NIIT Technologies
NIIT Technologies is a leading IT solutions organization, servicing customers in North America,
Europe, Asia and Australia. It offers services in Application Development and Maintenance,
Enterprise Solutions including Managed Services and Business Process Outsourcing to
organizations in the Financial Services, Travel & Transportation, Manufacturing/Distribution, and
Government sectors. With employees over 8,000 professionals, NIIT Technologies follows global
standards of software development processes.
Over the years the Company has forged extremely rewarding relationships with global majors, a
testimony to mutual commitment and its ability to retain marquee clients, drawing repeat
business from them. NIIT Technologies has been able to scale its interactions with marquee
clients in the BFSI sector, the Travel Transport & Logistics and Manufacturing & Distribution, into
extremely meaningful, multi-year "collaborations.
NIIT Technologies follows global standards of development, which include ISO 9001:2000
Certification, assessment at Level 5 for SEI-CMMi version 1.2 and ISO 27001 information
security management certification. Its data center operations are assessed at the international
ISO 20000IT management standards.
India
NIIT Technologies Ltd.
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Plot No. 5, EFGH, Sector 126
Noida-Greater Noida Expressway
Noida – 201301, U.P., India
Ph: + 91 120 7119100
Fax: + 91 120 7119150
Americas
NIIT Technologies Inc.,
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5th Floor, Atlanta, GA 30338, USA
Ph: +1 770 551 9494
Toll Free: +1 888 454 NIIT
Fax: +1 770 551 9229
Europe
NIIT Technologies Limited
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London - EC3R 7QQ, U.K.
Ph: +44 20 70020700
Fax: +44 20 70020701
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NIIT Technologies Pte. Limited
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#05-13 Techlink
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Ph: +65 68488300
Fax: +65 68488322
Write to us at marketing@niit-tech.com
www.niit-tech.com
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