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Three Questions: Derek Blum

Three Questions: Derek Blum

Last month, catastrophe risk modeling firm Risk Management Solutions Inc. introduced a new probabilistic model for assessing the risk of influenza pandemics across multiple countries. Recently Derek Blum, vp of emerging risk models for Newark, Calif.-based RMS, discussed the model, its creation and its potential significance.

Q. What is the basis for a model such as this? Do you start with historical information?

A. Absolutely. There are several differences between this and some other kinds of catastrophic perils. It does start with several different things and one is historic data. There is not extensive data, but there is some historic information. One source is the Spanish flu of 1917. It's not as rich as we would like it to be, but there is a lot that has been written on it.

But there is also other information that plays into developing the model. The epidemiological information, the information about how disease spreads, how disease spreads from person to person. Having an understanding of that plays into it. There are also the manmade pieces of it that come into play: government response, having a vaccine available. And those are going to vary from country to country.

One of the places that the modeling starts is just by identifying a range of possible pandemic scenarios. We start by just looking at the flu viruses themselves. There's obviously quite a range of viruses, and the viruses are constantly undergoing mutations.

We look at the impacts of that and there are two obvious ones: how lethal is it and how rapidly will it spread. That allows us to arrive at an event set. We've identified a little less than 2,000 possible pandemic scenarios.

Q. Did RMS develop this model in response to interest from clients and others in the insurance industry?

A. There definitely has been a significant need expressed by our client base within the insurance industry, but this is something we started looking at as early as 2004. This is something that very clearly falls in the realm of catastrophic perils. The immediate exposure isn't as great for (property/casualty) companies, but this is something that is likely to impact every insurance company and really everybody in the world.

The level of exposure, the level of risk is obviously going to vary. A company on the life side or the health side, they have a direct risk in the claims they will incur. But they also have a risk in terms of business continuity. Then they also have a triple whammy in terms of investment income.

Q. Would you expect the existence of a model such as this to not only provide companies a way to better manage exposures but also facilitate expanding the market for transferring pandemic risks?

A. We certainly hope so. The starting point for this is really for companies to understand and quantify what that base risk is.

We've heard from some of our clients (that have) an interest in transferring some of their risk. We've started to see the emergence of that, alternative risk transfer mechanisms in place. The market is still small for that, but obviously there is an interest in that. And having the model, this creates a language for helping them understand what the risk might be.