November 20th, 2012

Catastrophe Models: Implications of Emerging Market Growth on the (Re)insurance Sector

Posted at 1:00 AM ET

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President and Lucy Dalimonte, Senior Vice President
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Natural disaster risk assessment relies on probabilistic catastrophe models and historical data. The three main catastrophe modeling companies, AIR Worldwide (AIR), EQECAT and Risk Management Solutions (RMS), have therefore traditionally created modeling solutions for perils and territories considered to be peak risks. Although each modeling company has in recent years launched products for countries outside the more established markets of the United States and Western Europe, several gaps in coverage remain, particularly in emerging markets. This means that (re)insurers are currently struggling to monitor and measure their exposures in non-modeled countries. Moreover, for the models that exist, it is important that (re)insurers are aware of their limitations and consider the impact that these shortcomings have on their ability to control and price their risk exposures.

Such shortcomings were well demonstrated by events in 2011. Although global wind and earthquake risks are generally well modeled by the three main modeling companies, the powerful earthquakes of 2011 in New Zealand and Japan did expose gaps and limitations in the currently available models. For example, despite all three major catastrophe model vendors having earthquake models for Japan and New Zealand, the events were unexpected in their severity, liquefaction and consequential aftershocks. Tsunami risks, a large component of the Tohoku loss, are also not currently modeled, meaning there is a significant gap between confirmed losses and model-based scenarios for some earthquake events. In addition to property damage, business interruption losses and supply chain disruption remain unmodeled risks.

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