Karen Clark is president and chief executive officer of Boston-based Karen Clark & Co., a firm she established in 2007 to help insurance companies better understand catastrophe risk and utilize models and other information more effectively in managing their exposures. Recently, she spoke with Business Insurance Senior Editor Rodd Zolkos about trends in risk modeling and the development of open platform models.
Q: What sorts of changes or developments are occurring in risk modeling?
A: I think the most exciting things are not with the traditional vendor models but with the new tools and technology that are now available to insurers and reinsurers to improve the managing of risk.
I think the vendor models have served the industry well for the past 20 years, but companies are now looking at the new technology. The most exciting new technology is what's called open platform technology. And basically what that does is it gives the most sophisticated insurers and reinsurers more control over their risk management assumptions. Because the newer technology is fully transparent, it's more consistent and it's flexible.
Every company that uses the cat models has their own proprietary view. The way you do that with the vendor models — which has been the way companies have been doing it for the past 20 years — if you run a model or multiple vendor models you look at the output, and if it doesn't comply with your view you start adjusting it and tweaking it, you go through all sorts of contortions with the output. But in a vendor model you never have access to the assumptions directly. So you can't lift up the hood, look in there and tweak the assumptions.
But with an open platform, you can actually lift up the hood and look at the assumptions, and you can look at them directly. So what companies are able to do much more efficiently is modify the assumptions to conform to their own proprietary view.
In my presentations I've been joking with companies that in this day and age when Google (Inc.) and Facebook (Inc.) and the (National Security Agency) know everything about you, they know everything about everything — the only thing that's secret these days are the cat models.
Companies, in order to own the risk, to build their propriety view … want a more open platform that they can use to build their own view much more efficiently and much more cost effectively. That's really the future. That's where companies are going.
Just like the early adopters of the catastrophe models found the arbitrage opportunities and gained competitive advantage because they were the first ones to really figure out how to use this technology to their advantage, that's the same thing that's happening with the early adopters of the open platform technology. Those who embrace it sooner rather than later see how they can best leverage it and how they can gain competitive advantage over peer companies who still are using the older technology.
Q: How is climate change being factored into risk modeling?
A: The open platform technology is much more flexible to be able to incorporate companies' own proprietary views or any expert views that they want to utilize.
With climate change, no scientist knows the answers. Nobody can tell you what is climate change, what's that going to do for hurricane frequency or severity. There are a lot of hypotheses out there, but not enough data to make definitive conclusions.
The most advanced global circulation models are estimating that climate change will decrease frequency but perhaps slightly increase intensity over time. So if that's what you believe, you can use the open platform technology to modify your assumptions on the intensity of hurricanes. Because you can lift up the hood, you can modify the assumptions.
Q: Aside from the technology, are there human factors that are essential to modeling risks effectively?
A: When you're using a model, the vendor models, it's more or less that you're just taking somebody's view, the modeler's view. With open technology, it empowers you to come up with your own view. So what it does is it really enables you to understand the risk and take responsibility for the risk much, much more efficiently. For sophisticated companies and advanced companies, they embrace that. But for some companies, it's a little scary. “I don't just rely on the models, I have to really make my own assumptions?” That can be a little scary because you have to think and you have to come to your views and really take responsibility for your assumptions.
I've heard some companies say, a little tongue in cheek, “It's easy to blame things on the modelers.” So there is a little bit of a psychology shift, to say, “No, we're really taking responsibility for our own proprietary view. Our internal people really do understand the risk, and they are confident enough in their expertise to make the assumptions that our company will be using.”
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