Parametric Cover for Tropical Cyclones in Texas 6 April 2009
Texas – Disaster Relief and Contingency Account – Why? Over 150 hurricanes, tropical storms, and tropical depressions � Governor Perry have affected Texas since 1851. calls for a “Disaster Relief Most significant events create over- dependency on FEMA for � and Contingency immediate and continued response. Account” 2009 State of the Texas would like to augment FEMA post event funding, reducing � State Address dependency in immediate aftermath of storm. Texas is seeking a concept that will enable them to pre-fund � significant emergency response costs. Slide 2
Parametric / Modeled Loss Solution Product based on parameters that trigger release of funds when � thresholds are met. Texas pre-selects trigger levels to reflect greatest concerns. Population compounded by severity of wind are significant drivers � of emergency response costs. Parameters therefore include impacted population and pre-defined wind speed. Populations are determined by zip code or county, and each location � is designated as a “calculation unit”. Values of “calculation units” affected by wind are totaled to determine whether population trigger is met Calculation Units Triggering event releases 100% of preset funds for Texas to deploy � where and when most needed. Slide 3
Swiss Re Proposal Modeled � Population “vulnerability” (determination of population affected by As an option wind) can be: several – binary: single wind speed affecting population determines all or tranche levels nothing payout; or, at different – variable: impacted population set to different wind speeds with trigger variable credit given for populations with wind speeds below settings is highest threshold possible and � Model develops probability of loss based on historical storm will reduce patterns, current population, and vulnerability basis risk � Population factors, wind speeds, calculation units, algorithm and model are locked and stored (escrowed) Slide 4
Trigger – population at each affected calculation unit Calculation units within affected area are calculated to determine impacted population. Green only would be binary, green and white would indicate variable Red dots indicate calculation units Two different wind fields (speed and extent)
Swiss Re Proposal: Determination of payout amount Payout is determined by model � As an option several Post event storm details from National Hurricane Center are entered � tranche levels into escrowed model which will develop wind footprint across at different calculation units. trigger The model parameters and storm data will be used by the model to � settings is determine population “impacted”. possible and will reduce If combination of � basis risk – wind speed, and – population trigger cover, 100% of funds are released to Texas Slide 6
Parametric Hurricane Cover Trigger Summary: How does it work? Calculation Steps 1. Calculate wind speed at each NHC Track and parameters population grid point (for e.g. county, zip, etc.) using information from the National Hurricane Center (NHC) and Swiss Re’s wind field model 2. Determine percentage of affected population at each grid point using a Hurricane Ike (2008) – Wind footprint pre-defined vulnerability function 3. Calculate total affected population by summing up affected population from various population grid points 4. Determine total payout based on total affected population, trigger, and payout Design Slide 7
Sample Scenarios based on Loss Curves (binary trigger) A) Texas selects a Binary trigger: Reference Wind speed in – Wind Speed Trigger: 100% at 96 mph mph: – Population trigger: 400,000 Cat 1: 74-95 – Cost: $8* MM for $100MM in limits Cat 2: 96-110 Cat 3: 111-130 – Payout Scenario : 96 MPH Wind occurs in an areas with a Cat 4: 131- 155 population totals of 400,000, Texas receives $100MM. Cat 5: > 156 Model allows tailored selection of wind speed and population. As � population trigger increases, price decreases. As wind speed trigger increases, price decreases. The opposite is equally true. As variable options increase, price increases. Slide 8 * There will be a minimum premium based on limits
Sample Scenarios based on Loss Curves (variable trigger) B) Texas selects variable trigger: Reference – Wind speed trigger: 10% below 74 mph, 50% at 74 mph, 100% Wind speed in at 111 mph mph: – Population trigger: 375,000 Cat 1: 74-95 – Cost: $16.67MM for $100 MM in cover Cat 2: 96-110 Payout scenario : The storm is very wide, with the strongest winds at � Cat 3: 111-130 the center, but not in an area with a population that would trigger Cat 4: 131- 155 the coverage alone. Winds blow at 115 mph in an area with a population of 300,000, at 75 mph within an area of 150,000 and Cat 5: > 156 60 mph at an area of 100,000. The total population affected is calculated as: 100% 0f 300,000, � 50% of 150,000, 10% of 100,000, or 385,000. Texas receives a payout of $100MM Please note: in this example there are no partial payments, � therefore the total population affected, regardless of whether calculated with a variable or binary method, must exceed the Slide 9 affected population trigger.
Trigger Index Calculation Key Historical examples with current day population figures 1900 Galveston 1915 No Name 1919 No Name Previous storm tracks overlaid with current populations show the present-day potential Pop affected: 0.9M Pop affected: 2.5M Pop affected: impact of similar storms 1983 Alicia 2008 Ike 1932 No Name Pop affected: 2.2M Pop affected: 1.1M Pop affected: 0.65M Slide 10
Next Steps 1. Texas provides population data. Basis for 2. Texas selects data resolution (county or zip), limits;, continued wind speed, and chooses either binary (yes/no) or dialogue variable vulnerability Design. 3. Based on model provided loss frequency curve Texas will set the parametric impacted population target. 4. Provide Swiss Re with prior relief costs per unit of population will help in developing appropriate trigger. 5. All numbers are preliminary and subject to verification. Trigger will be further refined using additional information (for e.g. estimates of pop. affected in past events, etc.) * This represents a basic parametric structure. The previous slides are an indicative proposal of a potential solution. A meaningful dialogue will be necessary to structure a solution that addresses Texas’ unique needs. Slide 11
Contact Information Americas Alex Kaplan Public Sector Client Manager Swiss Re America Holding Corp. 101 Constitution Ave. NW Suite 700 Washington, DC 20001 Tel (202) 742-4623 Fax (202) 742-4615 E-mail Alex_Kaplan@swissre.com
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