Investors comfortable with long-standing earthquake catastrophe models

Successful catastrophe modeling relies on factors that include frequency of occurrence and reliable data from past events to produce accurate damage curves, leading insurance-linked securities investors to place their bets on the more well-understood events.

There is a high degree of comfort with earthquake models since they have been around almost as long as U.S. hurricane models and have been updated frequently, said Sherry Thomas, head of catastrophe management in the Americas, at Guy Carpenter & Co. L.L.C. in New York, a unit of Marsh & McLennan Cos. Inc.

Some insurance-linked securities investors are utilizing the industry's newest generation of modeling platforms as they push further into the insurance industry, said Karen Clark, president and CEO of Karen Clark & Co. in Boston.

“They are using the tools. We have ILS investors using Risk Insight,” Ms. Clark said of the company's newest modeling platform, which allows users to customize their model assumptions.

While terrorism and such threats garner attention and headlines, terrorism is “very difficult to model,” Ms. Thomas said.

That is due to the random nature of any event, the evolving nature of threats not resembling previous attack scenarios and relatively little data in the private sector to build models, she said.