Bring Catastrophe Models In House:

While many insurers obtain results of a portfolio-level catastrophe analysis from their broker, an increasing number are bringing the models in house to derive benefits that extend well beyond analyzing reinsurance needs.

In-house use of models enables a more dynamic view of risk accumulation and therefore more proactive strategic planning. Hands-on access to catastrophe models also provides underwriters with critical information for pricing individual risks and for evaluating their marginal impact on the portfolio. With direct access to these tools, underwriters will make better decisions on individual risks in real time.

Understand The Differences Between Catastrophe Models:

The models available from various vendors are based on largely similar historical data. However, small differences in model assumptions can lead to very different loss estimates.

Insurers should make sure the models they employ incorporate the most advanced science and engineering research, and they should evaluate the models on an annual basis. Given the significance of the decisions insurers make based on this output, carriers should take the time to understand the assumptions that form the basis of the models and feel free to ask tough questions of their vendors and brokers.

Capture Detailed Data During Policy Submission:

While the choice of catastrophe model certainly impacts loss estimates, the exposure and policy details used as input are equally important. To ensure the most accurate catastrophe loss estimates for individual properties, data gathered for policy submissions should be as detailed as possible.

Fundamental to high-quality data is the exact location of the property. Today, location information can be captured at the geo-coded, or latitude/longitude, level. Geo-coding is critical for proximity-based hazard assessment, exposure concentration analysis and catastrophe loss estimation. Technologies now exist that automatically “scrub” the address and convert it to a geo-code early in the analysis process.

In addition to location, insurers should make every effort to capture other key information about individual risks. Structural details such as age, construction type, roof shape, presence of earthquake retrofits, window protection and other characteristics can greatly influence the results of a catastrophe risk analysis for an individual policy or portfolio that differs from average industry exposures.

Seamlessly Integrate Catastrophe Analysis Into The Underwriting Workflow:

Enormous efficiency can be gained by seamlessly integrating all aspects of catastrophe risk management into the mainstream underwriting workflow. Through the use of technologies like application programming interfaces and Web services, catastrophe-modeling systems can be integrated with policy submission, underwriting decision-making and portfolio analysis systems to dramatically improve underwriting efficiency.

This provides a single repository for policy data and a single point of access for decision-makers at all levels of the organization.

Provide Underwriters With Seamless Access To Critical Information:

In addition to location and other information about the insureds property and employees, other data elements have a bearing on the evaluation of risk, pricing, insurance terms and basic risk selection.

From a catastrophe risk management perspective, these data elements are often peril- specificfor example, distance to coast, distance to the nearest active fault, and flood plain data. Other information such as claims/loss histories are key factors in the underwriting process.

Technologies are now available that seamlessly integrate all such information within a single user interface, providing insurers with immediate access to all critical underwriting information.

Reliable estimates of property replacement values are not only critical to developing reliable estimates of catastrophe loss, but undervalued properties leave policyholders vulnerable and can be a serious drain on company profits.

Integrating replacement cost valuation with catastrophe analysis can dramatically improve underwriting efficiency and reduce premium leakage. Web-based valuation tools can be directly linked to virtually any underwriting application, providing all stakeholders in the underwriting process immediate access to replacement values.

Leverage Catastrophe Modeling For Real-Time Portfolio Management:

Because catastrophes can have such a profound impact on the bottom line, catastrophe risk assessment should play a role in all portfolio accumulation and management decisions. This is easy to accomplish once catastrophe management is fully integrated into the underwriting workflow.

When catastrophe risk information on every policy is available at every level of the organization, data can be easily acquired and accessed for portfolio management decisions. This enables the portfolio management team to be kept current on how the book is being built, risk-by-risk, allowing for real-time analysis and portfolio optimization. At any time, management can identify areas of concern with respect to exposure concentrations, catastrophic loss potential, and how the book is evolving.

With these monitoring and evaluation capabilities in place at the book level, rules can be automatically incorporated into the underwriting workflow. This allows companies to proactively shape their book to meet corporate objectives.

Prepare For Multiple Losses In A Single Year:

Since Hurricane Andrew, most companies have tended to focus on the potential loss from the largest individual hurricane in a season, rather than the accumulation of individual losses from multiple storms. In 2004, this approach left some companies looking to purchase extra coverage mid-season.

Managing the risk from multiple event seasons is easy with the right tools. Companies should make sure that the catastrophe models they employ allow them to determine the probability of exceeding a given number of events in a year, estimate the likelihood of multiple losses exceeding a certain threshold in a single season for single or multiple perils, and estimate the losses to their portfolios from individual events in a multiple-event season.

In conclusion, as insurers take stock of last year's unprecedented hurricane season, more effective management of catastrophe risk will no doubt become a high priority.

We have reviewed a few approaches to leveraging catastrophe modeling that have been shown to increase efficiency and profits, while reducing risk. Those companies that incorporate these catastrophe-management best practices into their own catastrophe-risk management programs will be best positioned to handle the financial impact of future catastrophic events.

Uday Virkud is senior vice president at AIR Worldwide Corp., a catastrophe modeling company based in Boston.

Reproduced from National Underwriter Edition, December 30, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.