Changes in catastrophe models alter industry view of risk

Property/casualty insurers, reinsurers and reinsurance intermediaries use an array of sophisticated catastrophe models and tools to get a better sense of the risk presented by earthquakes, floods and windstorms.

Independent catastrophe modeling firms such as Boston-based AIR Worldwide Corp., Newark, Calif.-based Risk Management Solutions Inc. and Oakland, Calif.-based EQECAT Inc. serve underwriters and others with increasingly sophisticated offers.

But changes in modeling can significantly affect underwriting, necessitating adjustments to underwriting practices, capital requirements and reinsurance protections.

This was evident last year, when Risk Management Solutions released Version 11 of its U.S. hurricane model. After considerable questions from clients, the company issued a news release explaining that the increased volatility in its models was the direct result of improvements in underlying calibration data and modeling methodologies.

It is this inherent volatility in models has led many underwriters to develop a more nuanced view of risk by blending outputs from multiple models, said John DeMartini, New York-based leader of the catastrophe risk management practice at Towers Watson & Co.

“All these incidents from 2011 and the change in the RMS model got people thinking that they need to develop their view of cat risk,” Mr. DeMartini said. “We should not be entirely model-dependent; we have other tools and analyses available to us.”