Preface and Acknowledgments
This book had its genesis in June 1996 when the Wharton Risk
Management and Decision Processes Center (Wharton Risk Center) co-hosted
a conference on “Information Technology and Its Impact on Catastrophic
Risks”. It was one of the events that year celebrating the Anniversary of
the first computer (ENIAC) at the University of Pennsylvania. The focus of
the conference was on the challenges in dealing with natural disasters. There
had been two catastrophic events several years before — Hurricane Andrew
in 1992 and the Northridge earthquake in 1994 — that had raised grave
concerns within the private and public sectors as to what steps should be taken
to deal with future losses from these and other natural hazards. The
conference featured presentations by scientific experts on assessing these
risks, three leading firms [AIR Worldwide, EQECAT and Risk Management
Solutions (RMS)] on modeling the risks using information technology, and
the development of new strategies by insurers, reinsurers and financial
institutions for managing catastrophic risks.
Over the past 8 years, representatives from all these constituencies
have worked together as part of the Wharton Managing Catastrophic Risks
project to examine the role of catastrophe modeling in assessing and
managing natural disaster risk. This book is truly a joint effort with the
modeling firms and reflects the critical commentary and evaluations from key
individuals in insurance and reinsurance companies as well as financial
institutions who provided funds for the research activities.
From 1996 through 2001, the project was a joint venture between the
Wharton Financial Institutions Center (WFIC) and the Wharton Risk Center.
We want to express our deep appreciation to Anthony Santomero, director of
the WFIC during the first five years of the project, Peter Burns, project
manager, and Steve Levy, project coordinator, during this period. Thanks also
go to Franklin Allen, Richard Herring and Carol Leisenring who assumed
leadership positions at the WFIC after Anthony Santomero and Peter Burns
moved on from the Wharton School in 2000.
From the outset, our goal was to undertake state-of the-art research on
the role of risk assessment in developing meaningful strategies for managing
catastrophic risks. Although our focus was on natural hazards, we viewed the
project as one that could be applied to a wide variety of extreme events. In
fact, since 2002 the Managing Catastrophic Risks project has morphed into
the Managing Extreme Events project, which is one of the major ongoing
activities at the Wharton Risk Center.
To ensure the highest scientific standards, we formed a Technical
Advisory Committee (TAC) whose role was to provide detailed commentary
on the models developed by AIR Worldwide, EQECAT and RiskManagement Solutions. For the first few years of the project, this committee
met at least once a year and several members attended the semi-annual project
meetings. The TAC provided insightful comments on the use of the models as
a linkage between risk assessment and risk management and urged the
modeling firms to coordinate their efforts to the highest extent possible. They
were principally responsible for convincing the three firms that it would be
beneficial to all if a comparative study of earthquake risk were completed. As
a result, a study in Charleston, South Carolina presented in this book
illustrates the opportunities of utilizing these models for estimating risks,
while at the same time demonstrating the degrees of uncertainty surrounding
loss estimates.
Each of the three firms permitted members of the TAC to examine
their models. Subsets of the TAC visited AIR Worldwide, EQECAT and Risk
Management Solutions for a full day for this purpose. These TAC members
then wrote up reports on the technical accuracy of the models that they shared
with each firm as well as with the Wharton team. Through this process and
without revealing any confidential information, the TAC members were
convinced that all three firms base their models on the best scientific
information available. Without this assurance from the TAC we would not be
writing this book.
Most of the TAC members also commented on earlier drafts of the
chapters in the book. In particular, we want to thank Roger Borcherdt
(USGS), William Holmes (Rutherford & Chekene), William Iwan (Cal Tech),
and Robert Whitman (MIT), who spent considerable time in going over the
material on the book and writing up extensive comments for us. The other
members of the TAC who provided us with advice and guidance on the
project and to whom we owe a debt of gratitude are: Joe Golden (NOAA),
Mark Johnson (University of Central Florida), Ralph Keeney (Duke
University), Peter Sparks (University of South Carolina), Kathleen Tierney
(University of Colorado, Boulder), and Susan Tubbesing (EERI).
There are numerous other individuals and firms who played a key role
in this effort. Jim Tilley from Morgan Stanley and Jerry Isom from CIGNA
(now ACE) convinced their organizations to provide initial seed funding for
the project. Other sponsors included American Re, General Re, Goldman
Sachs, Japan Property and Casualty Association, State Farm, Swiss Re, and
Tokio Marine. A number of individuals from these organizations provided us
with extremely helpful comments at various stages of the project. They
include: James Ament (State Farm), David Durbin (Swiss Re), Carl Hedde
(American Re), Robert Irvan (CIGNA/ACE), Jeff Warren (General Re),
Gordon Woo (Risk Management Solutions), Yuichi Takeda (Tokio Marine).
American Re (Carl Hedde, Mark Bove, and Hjortur Thraisson) provided key
information on historic losses. Goldman Sachs (Vivek Bantwal and Ohi
Akhigbe) also provided helpful comments on the current state of catastrophe
bonds and other new financial instruments.
Special thanks go to the leadership in all three modeling firms for
agreeing to share their software with the Wharton team and to open their
doors to a dialog with academia: Karen Clark from AIR Worldwide; Dennis
Kuzak from EQECAT; and Tom Hutton, Haresh Shah, and Terry van Gilder,
who were at Risk Management Solutions when the project started.
The research on this book occurred over a span of almost 9 years, so
there have been a number of individuals who have played a key role in
helping to undertake the research that forms the basis for each of the chapters.
At the beginning of each chapter, we list the principal authors who took the
lead in writing the material, but there are others who played a role in
providing data for the various chapters. In particular, we want to thank Vivek
Bantwal, Jessica Binder and Jaideep Hebbar, three remarkable undergraduate
students at Wharton, who were indefatigable in their efforts working with the
modeling groups. Without their assistance, Chapters 8 and 9 in the book could
not have been written. Paul Kleindorfer, co-director of the Wharton Risk
Center, played a key role in providing inputs and guidance on the project from
its very outset. He participated in all the meetings of the project and provided
invaluable comments and suggests on all aspects of the research. We would
also like to thank Neil Doherty and Dave Cummins from Wharton for their
helpful comments and suggestions at various stages of the project. Both Neil
and Dave were undertaking complementary studies of risk transfer
instruments and insurance as part of the Managing Catastrophic Risks project
and were also involved in the meetings with the sponsors of the project. We
also had helpful discussions with Daigee Shaw of Academia Sinica in Taipei,
Taiwan. Erwann Michel-Kerjan of the Wharton Risk Center has reviewed the
entire book and provided insightful comments as to how the material on
natural hazards linked to other extreme events, notably terrorism.
We both had a wonderful time working with our co-conspirators from
the modeling companies, without whose active involvement this book would
never have been written: David Lalonde, Beverly Porter, and Mehrdad
Mahdyiar from AIR Worldwide, Dennis Kuzak and Tom Larsen from
EQECAT, Weimin Dong and Don Windeler from Risk Management
Solutions.
Chandu Patel from the Casualty Actuarial Society volunteered to play
the role of editor and has gone through every chapter with a fine tooth comb,
making a number of extremely helpful suggestions for improving the flow of
material. We want to thank Cathy Giordano from ACE and Tara Newman
from the Wharton Risk Center for their help in coordinating this effort. We
were also fortunate to have Ann Perch from the Wharton School and Hannah
Chervitz from the Wharton Risk Center go through the entire book to make
sure it was readable to a more general audience and was in final camera-ready
form for the publisher.
This has been a long journey that has taken Patricia Grossi through
her doctoral dissertation at the University of Pennsylvania, to an Assistant
Professor at Southern Methodist University and finally to her current position
at Risk Management Solutions. On September 3, 2001, Howard Kunreuther
began a one-year sabbatical at the Earth Institute (Columbia University) and
has been involved in terrorism research ever since September The last
chapter of the book reflects the broader objectives of catastrophe modeling by
applying the concepts from natural hazards to this risk.
Our families have been part of the process from the very beginning
and our spouses, Mohan Balachandran and Gail Loeb Kunreuther, deserve
special thanks for their encouragement and understanding.
Patricia Grossi