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Cat Modeling: Ingrained In The Industry, Embroiled In Controversy

Catastrophe models have become so ingrained in the insurance industry that a model revision can have profound effects on all aspects of the business, especially when loss results for some books of business can double.

By Chad Hemenway | Updated on March 18, 2011

Catastrophe models may be the best tools that insurers and reinsurers currently have to assess possible losses from major natural events, but even though their use is ingrained into the property insurance industry, reliance on model results remains highly controversial.

Nothing may illustrate the point more than when a modeler announces a revision to its model that could double loss indications for some portfolios, as Risk Management Solutions (RMS) did at the end of February. In some cases, loss results could increase even more, according to some model experts.

“Basically, this makes Ohio a coastal state,” said Frank Pierson, executive vice president and chief technical officer at New York-based reinsurance brokerage firm Holborn Corp., commenting on the RMS revision which increased wind-related loss estimates for inland states not traditionally thought of as being at significant risk for hurricane-related damage. “Companies will have to look at the new results the models give and figure out a transition.”

RISKS ONCE OVER THERE ARE NOW HERE—MAYBE

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