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Loss estimates provided by catastrophe modeling are receiving more scrutiny in the wake of hurricanes Harvey, Irma and Maria during the second half of 2017 as new analysis reveals patterns of inaccuracies over time, according to a report Thursday from JLT Re Ltd., the reinsurance unit of Jardine Lloyd Thompson Group P.L.C.
Catastrophe Models: In the Eye of the Storm, a JLT Re Viewpoint publication, says that the severe hurricanes of the 2017 season were “an important test for the latest generation of commercial hurricane models,” as past catastrophe events such as hurricanes Katrina and Ike and Superstorm Sandy have led to adjustments in the models to improve accuracy.
Analysis by JLT Re of modeled losses against real losses for events since 2004 found patterns of inaccuracies in modeled losses against final real tallies.
“At first glance, there is an overriding trend towards significant loss underestimation,” David Flandro, global head of analytics for JLT Re, said in a statement issued with the report.
Although the 2017 hurricanes bucked the trend and showed some signs of improvement, general skepticism remains, and modeling firms may be challenged by increasing market expectations for accuracy.
“While the accuracy of the modeled losses released for HIM in 2017 was mixed, certain results taken in isolation revealed some encouraging signs given the levels of complexities involved,” the report said.
The JLT Re study shows, for example, that models have performed relatively well for wind events that incurred moderate losses, regardless of landfall location, the statement said. Conventional hurricane events that do not assume super-cat characteristics are typically captured adequately by vendor catastrophe models.
The analysis and report showed strong model performance was observed when hurricane losses are both anticipated and contained.
Such models, however, have not performed as well for hurricane events where losses extend beyond wind into areas that are not modeled or well understood, the statement added.
Thus, current performance may still need to be improved, especially when considered against client expectations.
“Due to multiple areas of uncertainty in predicting industry-wide losses, vendor firms are likely struggling to satisfy market expectations for real-time loss information,” the report said.
Even though neither AIR Worldwide, a unit of Verisk Analytics Inc., nor Risk Management Solutions Inc. underestimated the total loss for Irma, the report said, “there is still significant uncertainty associated with Irma’s loss.”
“This highlights the inherent difficulties modeling companies face in predicting losses for complex hurricane events that strike highly populated urban areas,” Josh Darr, lead meteorologist for JLT Re, said in the statement. “These types of events often bring unforeseen consequences that cause losses to spiral. Results for hurricanes Katrina, Ike and Sandy show that catastrophe models have struggled to generate accurate loss ranges in such circumstances.”
He added, however, that modelers take such lessons to heart.
“Vendor firms have in recent years drawn on important lessons learned during these events to recalibrate their models and incorporate a whole host of previously un-modeled perils.”
The insurance industry since 1906 has seen and paid out its share of claims from catastrophic losses, but we fortunately have not yet experienced an insured-loss event greater than about $40 billion.