Risk managers turning more often to catastrophe models to gauge risk

Catastrophe modelers are reporting an uptick in interest in their products and services from risk managers.

"We are seeing a dramatic increase in interest--a 500% increase in inquiries from risk managers thus far in 2007 from last year," said Bill Keogh, Hackensack, N.J.-based group executive-global client development for Newark, Calif.-based Risk Management Solutions Inc.

"We think the reason is as parties to a transaction with an insurance company, the risk managers need to understand the techniques the insurers are using to evaluate their risk profile," said Mr. Keogh. "The more the insured knows about these techniques, the better it is for them to have an informed dialogue with their insurance company counterpart."

"EQECAT has always had a very active risk management practice working with major corporations," said Richard Clinton, president of the Oakland, Calif.-based modeler.

He said that 40% of EQECAT's revenue comes from risk management activity.

More sophisticated risk managers "really want an independent view of the risk. They want to be able to understand what that risk is," he said. The effect of the modeling goes beyond providing buyers with a negotiating tool, he said. The results can indicate whether an exposure is best mitigated through engineering or perhaps requires an alternative such as a catastrophe bond, he said.

There is "absolutely" an increased level of interest in modeling by risk managers, said Jayanta Guin, senior vp-research and modeling at the Insurance Services Office Inc.'s AIR Worldwide Corp. in Boston. He said that the 2005 hurricanes have greatly improved modeling so that factors such as downtime caused by the actions of civil authorities are now included in the programs.

Mr. Guin noted that modeling beyond standard property insurance is becoming more common. Modeling for business interruption exposures is becoming popular, he said.

"At the end of the day, every business is unique," Mr. Guin said. A hospital and a bank may be quite similar in a property model, but have entirely different business interruption profiles, he said. A bank might have to relocate in the aftermath of a catastrophe while the hospital would have to find some way to stay at least partially in operation.

RMS' Mr. Keogh predicted that the trend of risk managers using cat models will continue.

"We do not think this is an anomaly," Mr. Keogh said. "We think because insurance capacity will continue to be elusive that risk managers will continue to increase their reliance on catastrophe risk models even if market conditions change."