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Bringing Science to the Art of Underwriting™
TM
Modeling Catastrophe Risk to Marine and Energy Exposure in the Gulf of Mexico
Houston Marine Insurance Energy Seminar
Hemant Shah, CEO Risk Management Solutions
September 18, 2006
2CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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New Orleans, September 3 2005
70-80% of New Orleans flooded, 55% of the city’s 147,000 properties
inundated by more than 4 feet Maximum flood depths 18 feet.
4CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Pumps initially deployed from 1913-1928
The Expansion into the Floodplain
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1915 “New Orleans” Hurricane
Cat 4 Hurricane, 20 miles east of New Orleans (Grand Isle)– “Whole country between Poydras and Buras inundated. Levees gone, property
loss appalling. Life toll probably heavy. Conditions estimated worse than ever before. Relief needed. No Communications..."
Storm struck before the construction of the Industrial Canal On the Mississippi River below New Orleans storm surge
overtopped the levees below New Orleans and rose to 15-20 feet above sea level. – Swells rolled up the river in New Orleans 10-12 feet above high water.
Water was carried into Lake Pontchartrain and overflowed the existing levees to flood western part of the city – From the Old Basin canal (parallel to Orleans Avenue) to Broadway
and from Claiborne Avenue to Lake Pontchartrain
– Flooding 1-8 feet
After the passage of the storm the surge receded rapidly but the flood waters stayed in place for 3-4 days in New Orleans and had to be removed by the drainage system
(from1915 Monthly Weather Review).
6CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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The Expansion into the Floodplain
Second Second generation of generation of pumps pumps elevated to be elevated to be able to function able to function after a floodafter a flood
Bayou St. Jean at Lake PontchartrainBayou St. Jean at Lake Pontchartrain
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1947 Hurricane
Cat 3 directly over the City
Surge overtopped LakePontchartrain levees
17th St Canal wall failed
Up to 6 feet of water in parts of Jefferson parish
Standing water for weeks
– Removed through cutting and blasting holes in the levees
8CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Growth of New Orleans
Population of New Orleans
0
100000
200000
300000
400000
500000
600000
700000
1800 1820 1840 1860 1880 1900 1920 1940 1960
9CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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New Orleans Canals
Drainage CanalsMid 19th Century
Industrial Canal(link between Lake Pontchartrainand Mississippi R)1923
Inner HarborNavigation Canal 1923
Misssippi RiverGulf Outlet 1965
Developed after 1945
10CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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1965 Hurricane Betsy
Cat 3 Hurricane
12 foot storm surge
60,000 homeless
11CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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1965 Hurricane Betsy - Presidential Response
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2005 Hurricane Katrina - Presidential Response
13CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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100 Years of Storm Surge Flooding
1965 2005
1915 1947
15CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Mayor Pomfh’s Vision…
“I want to give positive assurance that our friends will find Miami this winter the same enjoyable, hospitable, comfortable vacation city it has always been.
I predict that Miami will make a world record come-back…we are ready to resume our place as the playground of the world”
-Miami Mayor E.C. Pomfh
…speaking six days after the September 18, 1926 storm struck south Florida
16CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Mayor Pomfh’s Vision…Realized
1990 Population of Dade and Broward alone exceed that of all 109 coastal counties (TX – VA) in 1930
– Of 67 coastal counties in LA ->FL, pop. density is 2.5X national average
During the Florida construction boom from 1970 – 1990:
– 70% of buildings in Broward and Palm Beach counties built in this period
– 75% increase in the population density in SE Florida
– Commercial values almost tripled in value The trend continues; from 1990 to 2000:
– The population of Broward County increased by 29%,
– and Collier County by 65%
Currently, 1,540 building permits issued in coastal counties every day
17CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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U.S. Hurricane Risk, RiskLink v6.0
““Tail” Tail” (Hurricane)(Hurricane)
$40 – 60B$40 – 60BKatrinaKatrina
Pro
bab
ilit
yP
rob
abil
ity
Pro
bab
ilit
yP
rob
abil
ity
LossLossLossLoss
$120 – 250B$120 – 250BMiami Cat 5, NYC Cat 4Miami Cat 5, NYC Cat 4 $300 – 350B$300 – 350B
““Worst Case”Worst Case”
18CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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The Capital Crunch will Catalyze Change
• New capital entering the market?
• Capital markets alternatives?
• Shortage of cover
• Change in market architecture?
-
10
20
30
40
50
60
70
80
90
Increase in one-in-250-year loss Capital increase
Lo
ss (
$bil
lio
n)
Personal lines
Commercial lines
$55 billion
$82 billion
Commercial lines
Personal lines
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Utility of a Catastrophe Model
GeographyGeography of Risk of Risk
Demographics of Demographics of of Risk ( of Risk (Gross/Net)Gross/Net)
Probability of Risk Probability of Risk (EP Curve)(EP Curve)
0 300
Miles
600
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Offshore Platform Modeling FrameworkRMS RiskLink v6.0, Released May, 2006
Define Hurricane
Claiming
Storm parameters
Basin-wide tracks, realistic time histories
Onshore and offshore “clash”
Time-stepping Time-stepping windfield windfield calculationscalculations
Windspeed and Windspeed and wave heightwave height
Submarine landslide
Physical damage Physical damage (PD)(PD)
Loss of productionLoss of production
BI, CBI, OEE
22CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Recent Storms to Impact the Offshore GOM
Plot of maximum windspeeds - 2002 to 2005 Lili, Ivan, Katrina & Rita
23CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Recent Storms to Impact the Offshore Region
Category
% Platform
s
1
2
3
4
5
5%
24%
33%
27%
5%
Total 94%
94% of the 4,200 offshore platforms in GOM experienced Cat 1 winds or greater from 2002-2005
24CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Hurricane Losses to Offshore ExposureIvan (’04), Katrina and Rita (’05)
Event Loss ($M)
Ivan
Total Insured
Platform PD
2,700
550-600
Katrina
Total Insured
Platform PD
6,000
3,000-3,200
Rita
Total Insured
Platform PD
5,000
2,400-2,600Obtained from various industry sources
25CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Lessons Learned of Relevance to Offshore Energy
Frequency and intensity of hurricane activity
– Likely to face elevated levels of hurricane activity over at least the medium term
– Prior modeling practice, based on long-term historical averages, underestimated the occurrence of intense storms
Vulnerability to damage and insured loss
– Physical damageability of platforms (et al) greater than previous expectation
– Time element risks are significant, and must be modeled
– Greater variability in risk to various classes of exposure
Making the transition from 1st to 2nd generation models
27CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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A Conspiracy Between Mother Nature and Developers?
Category 3-5 Atlantic Basin Hurricanes
1901-2005 and 5-year running average
Sustained period Sustained period in population in population growth and growth and economic economic development of development of coastal Gulf and coastal Gulf and SE regions of the SE regions of the U.S.U.S.
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0.2
0.4
0.6
0.8
1.0
1.2
1950 1960 1970 1980 1990 2000
0.6 = Average from 1900 - 20030.6 = Average from 1900 - 2003
0.9 = Ave. from 1995 - 20050.9 = Ave. from 1995 - 2005
US Landfalling Cat 3-5 Hurricanes
Decadal moving averageDecadal moving average
29CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Tropical Atlantic Sea Surface Temperature Departures (ºC) During Aug-
Oct (1951-2000 Base Line)
00
-0.2-0.2
-0.4-0.4
-0.6-0.6
-0.8-0.8
0.20.2
0.40.4
0.60.6
0.80.8
19501950 19601960 19701970 19801980 19901990 20002000
CCoo
0.5 C0.5 Coo
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Named Storms 11 15 28 13-16
Hurricanes 6 9 15 8-10
Cat 3-5 2 6 7 4-6
Cat 5 0.4 1 4 N/A
US Hurricanes 1.6 6 5 88%
US Cat 3-5 0.7 3 4 81%
Hurricane Activity on the Rise?
Initial 06 ForecastInitial 06 Forecast“Very Active”“Very Active”
Average Average 1950-20051950-2005
Other factors, Other factors, including temporal and geographic expansion of the basin; and including temporal and geographic expansion of the basin; and sustained intensity of stormsustained intensity of storm
20042004 20052005
31CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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NOAA Declares the Onset of an El Niño
September 10th, 2006
“Scientists at the NOAA Climate Prediction Center reported that El Niño conditions have developed in the tropical Pacific and are likely to continue into early 2007…Ocean temperatures increased remarkably in the equatorial Pacific during the last two weeks.”
"Currently, weak El Niño conditions exist, but there is a potential for this event to strengthen into a moderate event by winter…also, the development of weak El Niño conditions helps explain why this Atlantic hurricane season has been less active than was previously expected.”
“El Niño typically acts to suppress hurricane activity by increasing the vertical wind shear over the Caribbean Sea region. However, at this time the El Niño impacts on Atlantic hurricanes are small. We are still in the peak months of the Atlantic hurricane season, and conditions remain generally conducive for hurricane formation.”
32CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Expansion of the Atlantic Basin?
Tropical Cyclone Catarina Brazil Tropical Cyclone Catarina Brazil March 26March 26th – th – 2727thth 2004 2004
First S. Atlantic Hurricane?First S. Atlantic Hurricane?
Hurricane Alex (Cat 3) Hurricane Alex (Cat 3) most intense N of 38Nmost intense N of 38N
Aug 3Aug 3rd rd - 5- 5thth 2004 2004
Hurricane Ivan (Cat 5) Hurricane Ivan (Cat 5) Longest lastingLongest lasting
Intense HurricaneIntense HurricaneSept 5Sept 5thth – 16 – 16thth 2004 2004
Hurricane Wilma (Cat 5) Hurricane Wilma (Cat 5) most intense Atlantic most intense Atlantic Hurricane – 882 mbHurricane – 882 mbOct 18Oct 18thth – 25 – 25thth 2005 2005
34CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Climate Change Debate and Hurricane Activity
The WMO (World Meteorological Organization) has released a statement on the current state of debate– “The division in the community is not as to whether
Global Warming can cause a trend in tropical cyclone intensities. Rather it is on whether such a signal can be detected in the historical data base.”
– “Whilst the existence of a large multi-decadal oscillation in Atlantic tropical cyclones is still generally accepted, some scientists believe that a trend towards more intense cyclones is emerging.”
– “No single high impact tropical cyclone event of 2004 and 2005 can be directly attributed to global warming, though there may be an impact on the group as a whole.”
Prepared by the WMO/CAS Tropical Meteorology Research Program, Steering Committee for Project TC-2: Scientific Assessment of Climate Change Effects on Tropical Cyclones. February 2006
35CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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RMS Expert Elicitation, October 2005
Tom KnutsonTom KnutsonGFDL, NOAA, GFDL, NOAA, Princeton, NJPrinceton, NJ
Kerry EmanuelKerry EmanuelProfessor, MITProfessor, MIT
Mark SaundersMark SaundersProfessor, University Professor, University College LondonCollege London
Jim ElsnerJim ElsnerProfessor Professor
Florida StateFlorida State The Multidecadal Cycle The Multidecadal Cycle
19501950 19701970 1990199019301930 20102010 20302030
activityactivity
vv
The Climate Change TrendThe Climate Change Trend
19501950 19701970 1990199019301930 20102010 20302030
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Geography of Hurricane Activity IncreaseChanges in CAT 3-5 Activity vs. 1900-2005
+ 15 - 20%+ 20 - 30%+ 30 - 45%+ > 45%
Cat 1-2: 21% increase in activity Cat 3-5: 36% increase in activity
20% OP increase in rates
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Comparison of Industry Platform PD Losses to Modeled Estimates
39CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Development of Vulnerability Curves
Approach
– Analytical damage assessment• Detailed platform hurricane damage analysis reports
• Evaluation of structural response to wind and wave action
• Design guidelines
– Detailed analyses of historical claims data
Vulnerability curves are functions of:
– New construction classes
– New year-built ranges
– New occupancy classes
– Modeling of OEE
– Modeling of CBI
– OP specific loss amplification
40CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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New Construction Classes
Shallow Water
Fixed
– Up to 1971
– Post 1971
Deepwater
Jackups Caissons/Well
Protectors
– Up to 1971
– Post 1971 Fixed
– Up to 1971
– 1972 – 1980
– 1981 - 1993
– Post 1993 TLP/Spar Semi-submersibles Drillship
RiskLink® 5.0 RiskLink® 6.0
{
{
41CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Wind Speed/Wave
MD
R
6.0: Jackups
5.0: Shallow Water
Mobiles
Jackups Used for drilling new wells –
move from location to location
Design Requirements
– 10-Yr API Design• Wind (1-min): 78 mph
• Significant wave height: 26 ft
Typical damage mechanisms
– Failure of legs and separation of hull
Ocean Warwickafter Katrina
42CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Wind Speed
MD
R
6.0: Semis
5.0: Deep Water
Mobiles
Semi-Submersibles Used for drilling new wells – move from location to location
Design requirements
– Mooring line design criteria: similar to Jackups
– Rig itself designed to more stringent criteria
Typical damage mechanisms
– Mooring lines break
– Anchors dragged
43CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Platforms in Shallower Water
Wind Speed
MD
R
6.0: Caisson Up to '71
6.0: Caisson - Post '71
5.0: Shallow Water
Caisson/Well Protector Design requirements
– No design guidelines pre-1971
– Typically 100-yr winter storms/sudden hurricanes
Typical damage mechanisms
– Damage to deck and rails
– Bending of well jacket
44CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Platforms in Shallower Water
Wind Speed
MD
R
6.0: Fixed-Pre '71 6.0: Fixed-'72 - '80 6.0: Fixed-'81 - '93 6.0: Fixed-Post '93
5.0: Fixed - Structure Upto 1971 5.0: Fixed - Structure Post 1971
Fixed Platforms Design requirements
– No design guidelines pre-1971
– Typically 100-yr design criteria
– Further changes in 1980 and 1993
Typical damage mechanisms
– Wave-in-deck
– Buckling of legs
45CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Platforms in Deeper Water
Used for drilling new wells – move from location to location
Typically of modest risk since drill ships can be moved away from path of inbound storms
Drill Ship
Wind Speed
MD
R
6.0: Drillships
5.0: Deep Water
46CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Platforms in Deeper Water
Design requirements
– Stringent design guidelines
– Designed for deeper waters
Typical damage mechanisms
– Wave-in-deck
– Wind damage to topsides
Damage to Mars during Katrina
TLP/Spar
Wind Speed
MD
R
6.0: TLP/Spars
5.0: Deep Water
47CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Loss of Production Income (LoPI) Modeling Business Interruption (BI)
– Direct physical damage caused to the platform
– Modeled through effective downtime
Contingent BI (CBI)
– Damage to upstream facilities typically not owned by assured
– Pipeline• Mudslide
• Falling objects such as collapsed platforms
• Anchor drags
– Other platforms that serve as collection/processing hubs
– Damage to onshore facilities
50CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Operator’s Extra Expense (OEE) Modeling Coverage includes:
– Control of well
– Redrill costs
Modeled for:
– Caisson/Well Protectors
– Fixed platforms
Platform needs to be severely damaged/ collapsed
OEE vulnerability functions based on the probability of severe platform damage
Validated on MMS Well information
Ivan Katrina Rita
Num
ber
of
Wells
Lost
ReportedModeled
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Change in Modeled PD Risk, Industry Aggregate
2006 IED
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Evolution in Re/insurer Modeling and Risk Management Practice
53CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Risk increasing (modeled risk, more risks)
Capital requirements increasing (even for same risk)
Re/insurance rates increasing
Insurers are taking action to manage their exposures
Insureds retaining more risk
New capital entering the market, and ART
Insurance Industry Dynamics in Flux
““We remain of the opinion the amount of capital required by a We remain of the opinion the amount of capital required by a re/insurer in peak zones will increase by 50%+. We believe that re/insurer in peak zones will increase by 50%+. We believe that demand for coverage will increase as the new models are demand for coverage will increase as the new models are introduced, new PMLs are calculated, and rating agencies require introduced, new PMLs are calculated, and rating agencies require more capital”more capital”
- - Dowling and Partners Dowling and Partners
““We remain of the opinion the amount of capital required by a We remain of the opinion the amount of capital required by a re/insurer in peak zones will increase by 50%+. We believe that re/insurer in peak zones will increase by 50%+. We believe that demand for coverage will increase as the new models are demand for coverage will increase as the new models are introduced, new PMLs are calculated, and rating agencies require introduced, new PMLs are calculated, and rating agencies require more capital”more capital”
- - Dowling and Partners Dowling and Partners
54CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Severity / Correlation
frontier ofmodelability
Low High Extreme
SUPER-CAT
CAT Risk
Non-CATRisk
• Pricing• Risk Transfer• Capital efficiency
• Control• Capital adequacy
Fre
qu
ency
Lo
wH
igh
notmaterial
Risk Management Approach
• Per-risk models / scoring
• Probabilistic portfolio models
• Scenarios• Accumulation
Risk Measurement Techniques
Integrated Decision Making Under “Deep” Uncertainty
55CONFIDENTIAL© 2006 Risk Management Solutions, Inc.
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Modeling and Underwriting, Together““The most important factor in improving underwriting is better The most important factor in improving underwriting is better
information on risks…executives say believe that they need more information on risks…executives say believe that they need more granular risk assessments than traditional approaches”granular risk assessments than traditional approaches” - - Economist & Deloitte Insurance Survey 2003Economist & Deloitte Insurance Survey 2003
““Disciplined underwriting will continue that highlights exposure Disciplined underwriting will continue that highlights exposure data, related loss modeling and pertinent underwriting data, related loss modeling and pertinent underwriting information”information”- - 2005 Insurance Market Overview2005 Insurance Market Overview
““Whether they misclassify risk or allow risk pricing to be Whether they misclassify risk or allow risk pricing to be driven by the market instead of underwriting discipline...is driven by the market instead of underwriting discipline...is the fundamental driver of low returns in this industry”the fundamental driver of low returns in this industry”- - McKinsey & Company, The Journey Revisited 2004McKinsey & Company, The Journey Revisited 2004
““There is one certainty amid all this confusion. We are in a There is one certainty amid all this confusion. We are in a period of increased frequency and severity of hurricane period of increased frequency and severity of hurricane activity. The sooner the industry accepts this and adapts its activity. The sooner the industry accepts this and adapts its underwriting, the better off it will be”underwriting, the better off it will be”- - 2006 U.S. Insurer, Editorial Page2006 U.S. Insurer, Editorial Page
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