Keeping Up With Changing CAT Modeling Technology

Perhaps no facet of insurance technology changes faster than that which supports catastrophe models.

With research science and modeling capabilities advancing so rapidly, keeping abreast of the changes and building them into underwriting practices is vital. Indeed change is one of the few constants in the market.

In August, Newark, Calif.-based Risk Management Solutions (RMS) announced it will bring high-performance computing to CAT modeling through its new Enterprise Grid Computing software.

Enterprise Grid Computing, which integrates the RMS RiskLink modeling platform with Microsoft's Windows HPC Server, enables computing resources to be used much more efficiently, with more flexible job and resource management and faster analysis run times providing deeper insight into modeled results.

In July, AIR Worldwide released the latest version of the AIR Hurricane Model. Version 12.0 includes extensive updates to the hazard and vulnerability components of the model that incorporate the latest science, data, and detailed claims information from recent storms to provide a more comprehensive and realistic view of U.S. hurricane risk. The model's hazard module incorporates improved knowledge of the full 4-D structure of hurricanes, including the development of the storm footprint over time, the rate of the decrease in wind speed moving away from the eye of a hurricane, and the relationship between upper-level and surface winds.

And the Institute for Business & Home Safety (IBHS) in August announced that construction of its research center in South Carolina was nearly complete and that-as of press time-the facility should now be operating. The research center is the only one of its kind in the world, designed to accurately create severe weather events such as Category 1, 2 and 3 hurricanes, other types of high-wind events, wind-driven rain, hailstorms and wildfires. IBHS researchers will conduct full-scale testing of residential and commercial structures in the facility's 21,000 square-foot test chamber.

With all the change going on, it's important to closely monitor developments. "To stay on top of changing models, carriers should take advantage of the extensive educational resources modeling vendors have available to help their carrier clients understand the latest changes," says Karlyn Carnahan , principal, insurance, at New York-based Novarica. "Additionally, reinsurance brokers are a good resource, as they typically have departments focused on modeling and CAT management and can provide these services for a carrier."

MIX AND MATCH

As they try to stay on top of their catastrophe exposure, insurers need to successfully blend vendor provided modeling tools with internal expertise. CAT modeling "allows us to quantify our exposure to natural and man-made catastrophes," says Patrick Daley , head of property, Zurich North America Commercial, Schaumburg, Ill. "It's really the yardstick that the industry is using to measure those exposures."

Zurich has used modeling tools since 1996, and today leverages products from multiple vendors including RMS, AIR Worldwide and EQECAT Inc.Zurich models all its commercial exposure on a monthly basis and its terrorism exposure on a weekly basis, says John Elbl , global CAT modeling manager for the company.

The models help the firm assess its risk to natural peril that might not occur frequently, Elbl says. For example, both the east and west coasts of the United States have recently experienced growth in exposure to events such as earthquakes and hurricanes. "The CAT models help to assess how much exposure has increased along the coasts," he says.

Zurich is able to keep up with changes in technology because the vendors the firm uses update their models each year, Elbl says. "Every year new science is applied to models," he says. "We use that in adjusting our underwriting guidelines." He says any major scientific findings from organizations such as the National Oceanic and Atmospheric Administration (NOAA) are typically incorporated into models within a year.

Daley says the firm also holds detailed discussions with the modeling companies "to understand the changes that are made to the models." These discussions are held as frequently as four or five times a month.

Another insurance provider, Los Angeles-based Farmers Insurance Group, a Zurich Financial Services company, uses geospatial-based technologies and other mapping software along with proprietary business intelligence tools that the firm developed internally, says Joel Vandenhouten , logistics manager.

"The advantage of using proprietary tools is that they are designed to work with our existing systems," Vandenhouten says. "The models are based on our experiences and our knowledge of our customers. These tools are customized to reflect Farmers unique catastrophe response philosophy. The challenge is [that] no easy out-of-the-box solutions are available today."

WORKING TOGETHER

Vandenhouten says that because the company fosters a culture of innovation, Farmers often hears about new modeling technology from its own employees. "Any employee anywhere in the company has the ability to say, 'hey, this new technology just came out and I think we could leverage it,'" he says. "We hear quite a bit of that at Farmers and we act on it."

Indeed, Carnahan says to effectively address CAT risk, a free flow of information and ideas between departments is critical. For example, CAT modelers observing an event as it unfolds have a wealth of extremely valuable data for a claims department. "Specific event characteristics can be run against the company's detailed exposure data to estimate the number of claims and better deploy the optimal level of personnel to the event," she says. "Claims departments can determine where to place command centers, how many adjusters are needed, and what skill level of adjuster is needed-and be sure to keep them in a safe location."

She also suggests that insurers tie modeling data into the underwriting decisions using real-time alerts and business rules to assess and track probable maximum losses in order to better manage and balance the overall portfolio.

Nonetheless, Carnahan recommends that firms have a dedicated staff that manages the process of monitoring and using CAT modeling tools. Other best practices include modeling before an event as part of a planning exercise, thinking through the ramifications of certain types of events and assuring that a solid catastrophe response plan is in place.

Bob Violino is a New York-based business editor and writer and frequent INN contributor.

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Multinational Effort

In addition to insurers and reinsurers, governmental entities are also taking a grater interest in the offerings of risk modeling vendors.

The Caribbean Catastrophe Risk Insurance Facility (CCRIF) is a risk-pooling facility owned, operated and registered in the Caribbean for Caribbean governments. CCRIF’s facility supervisor Caribbean Risk Managers Ltd. “is tasked with monitoring developments in CAT modeling, which we do through interaction with the lead modeling companies [and] reinsurers,” says Simon Young , CEO of Caribbean Risk Managers. “Our underwriting practices are directly related to the model in use, as the policy is a parametric one.”

CCRIF, based in the Cayman Islands, recently switched from a model provided by EQECAT to one that was built for CCRIF by Kinetic Analysis Corp. “In both cases, the model dictates the pricing to insureds, capital/reinsurance [requirements] and is also used as the final arbiter of loss in the parametric policies which CCRIF issues,” Young says. “We have earthquake and tropical cyclone models for the Caribbean Basin and Bahamas/Bermuda, and are currently finalizing a rainfall model.”

According to Young, the organization wouldn’t be able to operate a parametric scheme without the models. “They underpin most of what we do.”

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