October 22nd, 2017

Interoperability: A case for open source - GC@BB Commentary

Posted at 8:15 AM ET

peter-hearn-2-sm1Peter Hearn, President & CEO

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  • Industry-wide call for increased transparency in cat modelling
  • Interoperability facilitates collaboration of multiple data sources
  • Open source models allow insurers to develop own view of risk

Catastrophe (cat) risk models are fundamental tools for insurers, reinsurers, emergency planners, urban planners, and every business or government entity impacted by natural catastrophes. Since their creation by commercial vendors, computerized models have been essential for risk selection, assessing capital adequacy and measuring profitability, and are critical in both the public and private sectors for catastrophe and emergency response management.

“For over 25 years, these models have led us on a journey toward increased risk understanding,” says Peter Hearn, President & CEO, Guy Carpenter, “a journey that now continues with the availability of open source model environments. Clients and regulators alike want to bring transparency, increased competition, and lower costs to the existing ‘black box’ model so companies can develop their own view of risk.”

“The challenge with the ‘black box’ model is people don’t understand the input and output, which are key decision-making variables for insurers and reinsurers.” He explains, “Insurers and reinsurers have a fiduciary obligation to understand their risks and the models used to evaluate that risk. Insurers must also be empowered to better communicate their risk management decisions to shareholders, policyholders and regulators. When companies can make more informed decisions, they are better stewards for the industry and can potentially offer more products and protection to the marketplace.”

He continues, “An open source model allows companies to see the assumptions behind the calculation and lowers the cost of entry into the cat modelling business. More importantly, the standardized and interoperable hazard, vulnerability and financial modules included in a true open source model facilitate the collaboration of data from insurers, reinsurers, entrepreneurs, scientists, computer programmers and individuals, all of which may result in a new generation of cat models.”

Interoperability refers to the ability of different systems to share data with each other, interpret that data and present it to users in an accessible format. In an open source model environment, interoperability facilitates the proliferation of multiple scientific views in hazard modules with clients who use their own claims experience to shape vulnerability assumptions and financial engines which better reflect the complex nature of policy coverages.

Hearn believes, “Interoperable, transparent, and auditable catastrophe models will benefit both the public and private sectors, and result in improved risk management decisions that will better protect communities, businesses and families. When more information is known about catastrophes, more capital will be made available to cover perils which can potentially lead to a reduction in the coverage gap between insured and economic losses.”

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