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BY SHERYL JEAN; Pioneer Press, July 18, 2004

If you've seen the movie "The Day After Tomorrow," you have some sense - with the help of a lot of special effects and some far-fetched storytelling - of the havoc wrought by natural disasters.

The film's depiction of an overnight change in the climate is about as feasible as making ice in a sauna, but it has focused attention on catastrophes and some of the technology used to help forecast and monitor them.

"That was a sensational way of looking at what insurance companies face every day," said Paul Karon, president of U.S. operations for Benfield in Bloomington. "We're in the business of helping insurance companies understand their risks and hedge their risks."

Karon oversees a team of mathematicians and tech wizards who use elaborate computer programs and stunning graphics to analyze tornadoes, hurricanes, cyclones and other calamities. Benfield, the nation's largest independent reinsurance broker, doesn't predict when natural disasters will occur as in "The Day After Tomorrow," but it does track them.

Eric Enslin, a vice president at Benfield, can take a computer program, or model, with massive amounts of historical disaster data and add insurance policy information, including location, coverage limits and construction type to calculate the potential number and cost of storms in a given year by state, city, ZIP code or street address. The analysis of simulated disasters over 10,000 or more years can take a couple of hours or five days.

Benfield can tell an insurer to expect $1 billion in insurance claims from a hurricane every 50 years and $5 billion in claims every 150 years. It beats the old days when companies punched pins into a map to keep track of their risk.

Benfield officials say demand has increased for catastrophe reinsurance and modeling as insurers have faced big payouts from disasters in recent years. As those insurance payouts have increased - from big storms and an increased risk of terrorism - insurers have sought new ways to help them estimate potential claims, set rates and decide where to expand or reduce business.

Reinsurance is insurance sold to insurers and government entities to cover excessive claims. Demand for catastrophe reinsurance and modeling spiked nationally after Hurricane Andrew in 1992, the world's most costly natural disaster in the past 30 years. In the Midwest, demand picked up after the 1998 hailstorms caused damage to houses.

Most major property insurers carry catastrophic reinsurance coverage, mainly for houses but also for automobiles and businesses. Benfield's customers include the largest U.S. insurers, such as State Farm and Allstate, as well as the California Earthquake Authority, the Florida Hurricane Catastrophe Fund and the federal Terrorism Risk Insurance Program.

DISASTERS ADD UP
Natural disasters represent the single largest risk for insurers and policyholders. Disaster claims - along with the rate of inflation, the frequency of claims, a change in coverage and other factors - play a key role in pricing homeowners' insurance policies.

Claims from natural disasters, such as tornadoes, have been rising in Minnesota and the Upper Midwest, said Bob Hartwig, chief economist for the Insurance Information Institute, a national trade group. In the past 10 years, 292 U.S. disasters caused $105.13 billion in insurance claims, according to the institute. Last year, 21 disasters caused about $13 billion in U.S. insurance claims, the third-highest year on record. Disaster costs are on track to total $8 billion to $9 billion by year's end.

Disasters accounted for the most homeowners' insurance payments at Edina-based Western National Mutual Insurance Co. in the past five years, said president Stuart Henderson. Its disaster claims are about $1.5 million so far this year versus $3 million in 2003. Western National has catastrophic reinsurance for claims totaling more than $5 million up to $55 million for 42,000 houses and 108,500 automobiles in five states this year versus a $60 million limit last year, he said.

Overall, U.S. insurers typically carry natural disaster reinsurance coverage ranging from $30 million to $1 billion at the largest companies, though the amount depends on the geographic region, the number of policies and other factors, Karon said. Worldwide, the natural disaster reinsurance limit totals about $25 billion, said Andy Castaldi, head of catastrophe perils for the Americas at Swiss Re, one of the world's largest reinsurance companies.

CATASTROPHIC STRATEGIES
London-based Benfield Group plc, the worldwide leader in catastrophic reinsurance, purchased EW Blanch, a reinsurer based in Bloomington, in 2001. The Bloomington office, with 350 employees, is the largest of Benfield's 12 U.S. locations. Revenue for Benfield's U.S. division, which represents half of the company's total business, rose about 5 percent to $224 million in 2003, partly because of the addition of new, large customers.

In 1986, EW Blanch created new types of tornado and hurricane models. Benfield no longer develops proprietary models, but licenses all the major models and "soups them up," Karon said.

Western National, a Benfield customer for about five years, typically requests wind and earthquake models twice a year to help it monitor policy concentrations in high-risk areas. "Otherwise, how would I know if writing 100 more homes in St. Paul has affected my exposure?" Henderson said.

The models have influenced where Western National writes business in Minnesota and South Dakota. In the past two years, it didn't write any new policies in certain ZIP codes, such as in St. Cloud, because the wind and hail storm risk was so high, Henderson said. Western National, which insurers more than 32,000 houses in Minnesota, has started to write new policies again because the company is financially stronger, he said. Larger insurers, such as St. Paul Travelers Cos., have brought modeling in-house. The company, with more than $20 billion in personal and business net written premiums, buys and runs its own catastrophe models. The St. Paul-based insurer even has a unit in California dedicated to catastrophe risks.

"We feel it's important, especially for a company of our size, to have the models in-house so we can use them to manage risk," said Christopher Gross, who is in charge of catastrophic modeling for St. Paul Travelers. Some of its catastrophic models take a few minutes to an hour, but it can take weeks to run a model across all insurance lines and then sort and analyze the information, he said. The company declined to disclose its catastrophic reinsurance limit.

NEW MODELS
Insurers are requesting more frequent analyses of more catastrophic models, said Paul Budde, head of Benfield's catastrophe modeling unit in Bloomington. Models exist for U.S. hurricanes, earthquakes, tornadoes/hail storms and terrorism. New models are being developed for winter storms and brushfires. Benfield's Bloomington office was vital to the insurance industry during last summer's California wildfires by keeping a real-time map of damages.

The first terrorism models appeared in 2002 after the Sept. 11, 2001, terrorist attacks on the World Trade Center and the Pentagon, the world's costliest disaster. Claims from the attacks are projected to reach $30 billion to $35 billion, with reinsurers paying about two-thirds of the total. St. Paul Travelers recently started using a terrorism model and other methods, such as mapping and tracking its policy concentration in certain areas, to assess its terrorism risk, Gross said.

"By definition, all models are wrong but it's the best tool companies have to make intelligent decisions," Benfield's Karon said. He acknowledged that modeling is part art and part science, but it's nothing like the forecasting technology portrayed in the movie "The Day After Tomorrow." Still, Karon saw the film and liked it.

For further information, contact:

Mary S. Manley
SVP Corporate Affairs & Administration
952-921-3820
mary.manley@wnins.com