1Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved. CATASTROPHE MODELING FOR MARINE CARGO Chris Folkman, Director, Product Management

2Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved. Agenda Why are we building marine cargo cat models? How do cat models work? How are they different from regular property models? How can they help with situations like Tianjin?

$10 trillion Estimated value of global seaborne trade, annually (China’s GDP = $9.25 trillion)

4Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved. Hurricane Sandy: $3 billion loss to marine lines 16,000 cars at ports destroyed 65,000 watercraft damaged 15,000 TEU of loaded containers damaged $100 million single fine art loss claim In addition to large marine losses from: Kobe EQ (1995) Typhoon Maemi (2003) Tohoku EQ (2011)

5Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved.Copyright © 2015 Risk Management Solutions, Inc.. INCREASING EXPOSURE International Seaborne Trade (MM tons)

6Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved.Copyright © 2015 Risk Management Solutions, Inc.. INCREASING ACCUMULATIONS OF VALUE

7Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved.Copyright © 2015 Risk Management Solutions, Inc.. And other considerations … Accumulation clauses magnify the problem. Coverages are broadening (stock throughput) Today’s cargo modeling is just a “rough approximation.”  Classifies cargo as “contents”  Does not consider packaging or salvage potential  Assumes it is at risk 365 days a year There is opportunity to raise the bar.

8Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved.8 CAT MODEL BASICS

9Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved. CALCULATION STEPS OF A CAT MODEL Assess Hazard Calculate Damage Quantify Financial Loss Generate Events Apply Exposure Addresses  lat long Which events in the catalog damage insured properties? What is the wind speed? Flood depth? Ground shaking? Bomb blast intensity? Damage ratio for each location. Salvage value for cargo Mitigations (sprinklers, roof cladding, base isolation) Exceedance probability (1-in- 100, 1-in-250) Average Annual Loss Different for cargo

10Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved.10 VULNERABILITY

11Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved.Copyright © 2015 Risk Management Solutions, Inc.. Marine Vulnerability Material Packaging Storage Configuration Cargo Vulnerability

12Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved.Copyright © 2015 Risk Management Solutions, Inc.. MODELING MARINE CARGO Current ModelsNew Cargo Vulnerability Occupancy: Wholesale Construction: Steel # of Stories = 1 Contents Grade = Damageable Occupancy: Temperature Controlled Construction (Storage) Options: Liquid Tanks Inside Warehouse at Port Containerized At destination warehouse At destination – retail Refrigerated Containers (“Reefers”)

13Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved. SALVAGE POTENTIAL VARIES BY PRODUCT Jeweler’s Block Livestock Heavy Industry Dry Bulk General Cargo Auto Consumables Pharma Temperature controlled High salvage potential Low salvage potential This can change with contract provisions (i.e. brand protection clauses). The model allows override.

14Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved. DAMAGE REDUCTION MEASURES VARY BY PRODUCT, STORAGE CONFIGURATION Fine Art Cash in Transit Electronics Explosives General Cargo Auto Heavy Industry Liquid Bulk Petroleum High damage reduction measures Low damage reduction measures  Certain product classes are more susceptible to damage during transit  Some cargo is moved out of storm path (fine art)  Damage reduction factor varies by product & storage configuration

15Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved. Building Contents vs. Cargo Building “Contents”Marine Cargo At risk 365 days per yearAt risk only when at insured premises Heterogeneous products, for everyday use.Homogeneous products, sale-ready Rarely packagedCarefully packaged Minimal salvage effortsExtensive salvage efforts Stored inside structureStored in many different configurations (containers, silos, warehouses, pallets). Cargo can be less vulnerable than contents given the same level of hazard. (With notable exceptions - autos stored in open lots, temperature controlled pharmaceuticals, sensitive equipment, etc.)

16Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved.Copyright © 2015 Risk Management Solutions, Inc.. Marine Vulnerability Scheme Peak wind speed (mph) Mean Damage Ratio (%) U.S. Cargo Vulnerability Autos stored in open lot General cargo inside warehouse

17Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved.17 PORT EXPOSURE

18Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved.Copyright © 2015 Risk Management Solutions, Inc...  Port-specific Industry Exposure Databases (IEDs)  Estimate exposure value taking into account Cargo Classification Time in Port Trade Seasonality Volume  Provide geographic distribution of exposure within a port  Account for storage structures Warehouses Tanks Silos Port Exposure Data

19Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved. Key Facts #1 port in North America for petroleum #1 port on U.S. Gulf Coast by tonnage #13 in the world for total tonnage #73 in the world by TEU throughput (containers) Port of Houston: $240 billion of annual trade

20Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved.Copyright © 2015 Risk Management Solutions, Inc.. Port of Houston Terminal Layout Bulk Petroleum Project Cargo Auto Container Terminals

21Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved. Container Terminal Petroleum and Bulk Terminal Geospatial Analysis Allocating cargo exposure to storage structures

22Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved.Copyright © 2015 Risk Management Solutions, Inc.. Key Terminals, Shanghai Port 100 Kilometers!

23Copyright © 2015 Risk Management Solutions, Inc. All Rights Reserved.Copyright © 2015 Risk Management Solutions, Inc.. Conclusions Models usually over-state the cat risk for cargo  No salvage value considered  No packaging considered  365 days at risk assumed But some classes of cargo are even MORE vulnerable than suggested by the models (autos, sensitive equipment, pharma, etc). Current state of cat modeling in marine cargo leaves something to be desired. The market needs cargo- specific models, not property models that are jury rigged to produce cargo loss.