Why Don’t Cat Models Work or Do They?

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

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

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

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

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

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

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

Underwriting Cycle

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

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

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

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

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

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

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

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

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

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

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

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

Why Don’t Cat Models Work or Do They?