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Why Don’t Cat Models Work or Do They?

This presentation explores the role of models in the insurance industry, focusing on the changes in expectations, the impact of data quality, and the re-establishment of modeling as a valuable tool. It also discusses the benefits of ensemble reporting and the importance of communication and anticipation in the underwriting process.

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Why Don’t Cat Models Work or Do They?

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  1. Why Don’t Cat Models Work or Do They? The Role of Models: A View From Both Sides CAS Presentation May 8, 2006 Maria Kovas

  2. Overview • Role of Modeling during the Quiet Years • Original Role of Modeling • Change in Expectations • Return to the basics

  3. During the Quiet Natural Catastrophe Years Leading Role in: Reinsurance Pricing Underwriting Primary Pricing Business Planning Post Event Loss Evaluation

  4. Original Role:Diagnostic Device • Distribution of Exposure • Identification of High Density Areas • Review of Adjacency of Risk in Key Peril Areas • Consideration of Redistribution of Exposure

  5. Identification of Drivers of Risk • Review of PML in Modeled for Modeled Perils • Application of Secondary Peril information • Modeled • Un-Modeled

  6. Consideration of Data Quality and the Impact on the Diagnostic Process • Inclusion of additional sublimits and deductibles • Identification of more building characteristics • Cost Benefit analysis of modifying systems to update the data

  7. Metrics • Determination of Business/Underwriting Goals • Review the current position of the organization • Chart the differences and devise options to achieve Goals • Periodic review and updates of movement in the process

  8. Underwriting Cycle

  9. Catastrophic Response • It is not possible to plan for a Catastrophe • It is possible to evaluate event curves • Event drills • Deployment of claims teams • Setting management expectations

  10. Factors Contributing to the Change in Expectations: • Peril Modeling vs. Total losses • Second Generation Modelers • The Quiet Period • Data Issues • Updates to methodologies

  11. Peril Modeling vs. Total losses • Models are based on specific perils • Review of actual events to calibrate model outputs • Quiet period limited the number events for calibration • Actual losses are based on all affected perils

  12. Second Generation Modelers First Generation-Professional insurance/broker/reinsurers-recruited to use the models because of aptitude or interest Second Generation-Professional modelers recruited for technical aptitude and skill in running the models

  13. The Quiet Period • Modeling became the sole focus of loss estimates • Comfort level because losses were within a tolerable variance

  14. Data Issues • Models capable of refinement with additional data points • Data capture may be not updated to match the capabilities of the models • Valuation issues • New financial structures

  15. Updates to methodologies • New interpretation of historic data • Updates to the science used in the models • Changes to the methodology • Re-calibration of models and vulnerabilities

  16. Re-establishing the Role of Modeling • Model data as Currency • Return to the basics • Ensemble Reporting • Setting expectations

  17. Model data as Currency: • Definition of the data coin • A data formatted in such a manner to be shared among industry business interests • Standard evaluation of the data coin determine the confidence in the data • Confidence in the data leads to rate considerations

  18. Return to Basics • Underwriting Cycle • Review Reporting provided to management • Recreate event drills • Refresh training • Update data capture and interface

  19. Ensemble Reporting • Create Multiple Views of Exposure • Model what is available • Identify and communicate gaps • Evaluate Secondary Perils • Use Mapping

  20. Communicate Anticipate questions Consider key issues in the firm Review the diagnosis Determine if the remedies are cost effective

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