Cat modelling for the cargo line: Charting the opportunities, navigating the challenges

By Chris Folkman, Risk Management Solutions, IUMI Professional Partner

“Unacceptable.”  “Poor.”  “Failed.”

Such was the assessment of several reinsurance companies on the state of catastrophe modelling for the marine cargo line, according to a report in Insurance Day.

The pointed criticism came following the Port of Tianjin explosions, and the fact that it was the second time in three years that the cargo industry had been “surprised”. Superstorm Sandy was the other occasion, delivering a hefty $3 billion in marine loss. The reinsurance companies were unequivocal on the cargo market’s need to markedly increase its investment in understanding lines of risk in ports.

They have a point. Catastrophe modelling has traditionally focused on stationary buildings, and marine cargo has been treated as somewhat of an afterthought. Accumulation management for cargo usually involves coding the exposure as “warehouse contents”, positioning it at a single coordinate (often the port centroid), and running it though a model designed to estimate damages to commercial and residential structures.

This approach is inaccurate for several reasons: first, ports are large and often fragmented. Tianjin, for example, consists of nine separate areas spanning more than 30 kilometers along the coast of Bohai Bay. Proper cargo modelling must correctly account for the geographic distribution of exposure. For storm surge models, whose output is highly sensitive to exposure positioning, this is particularly important.

Second, modelling cargo as “contents” fails to distinguish between vulnerable and resistive cargo. The same wind speed that destroys a cargo container full of electronics might barely make a dent in a concrete silo full of barley.

Finally, cargo tends to be more salvageable than general contents. Since cargo often consists of homogenous products that are carefully packaged for individual sale, more effort is undertaken to salvage it after being subjected to damaging forces.

Given the cargo line’s razor thin margins, the moribund growth in its exposure base, and its recent cat experience, the status quo in catastrophe analytics is no longer a viable option.  The cargo industry must achieve a more robust understanding of its exposure, how it accumulates, and how vulnerable it might be to future losses.

Chris Folkman, Risk Management Solutions