Catastrophic event modeling in the Gulf of Mexico - II. industry exposure and value at risk

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Catastrophic event modeling in the Gulf of Mexico - II. industry exposure and value at risk

Kaiser, M.J. / Pulsipher, A.G. / Darr, J. / Singhal, A. / Foster, T. / Vojjala, R.

The offshore insurance industry has traditionally been defined by a 'trader' mentality in which companies have been willing to hold risks without attempting to model or further quantify their risk through technical appraisal. The 2005 hurricane season in the Gulf of Mexico changed this perspective, and underwriters began to control their exposure to contingent losses through policy sub-limits and other restrictions on coverage. The purpose of the final part of this two-part article is to quantify the losses to property damage in the Gulf of Mexico for historic weather events using the Risk Management Solutions Offshore Platform Model. Value at Risk measures indicate that the financial exposure of Gulf assets is on the order of Dollar 60-70 billion in platform and rig exposures not accounting for pipelines and wells. Probabilistic scenarios from storm simulations indicate a 100-year loss estimated at Dollar 5.7 billion and a 250-year loss estimated at Dollar 7.5 billion for physical damage to platforms and rigs not including business interruption and operator extra expense losses.