The Multiple-Model Approach
to Catastrophes
Insurers are finding that multiple views may be
best when modeling for natural disasters.
By Bob Violino
It’s a gIven that catastrophe
models play a key role in helping insurers estimate the
losses that could result from cat events such as earth-
quakes and hurricanes. But these models don’t work
in isolation. to get even more accurate assessments,
insurers increasingly are using them in conjunction
with other models—commercial or homegrown—and
with data from other sources such as satellite and ra-
dar systems.
one recent trend that’s spurring the use of multiple
cat models is the growing pressure from regulators
and ratings agencies in the wake of widespread disas-
ter-related losses for insurers and reinsurers.
For example, ratings firm standard & poor’s in sep-
tember 2011 reiterated its call for the use of multiple
cat models by insurers. to avoid instances of “model
shopping,” the ratings firm says it prefers that insur-
ers and reinsurers use models from at least two of the
big three modeling firms—risk Management solutions
(rMs), aIr Worldwide and eQecat—when assessing
catastrophe risk for natural peril catastrophe bonds.
“Loss estimates from an event, or the likelihood of an
event, can differ significantly between modeling agen-
cies, according to how the data is interpreted,” s&p
notes. “We therefore consider that a multiple-model
approach would give existing and potential investors
a better perspective on the range of potential out-
comes.”
based allianz group, says the firm uses models from
multiple sources. steimen says in addition to a prima-
ry model from one of the big three, the company em-
ploys “second opinion” models from another vendor
as well as models from brokers and those the company
has developed on its own.
A BROADER PROCESS
Likewise, Matthew Jones, head of catastrophe management, global underwriting at the schaumburg,
Ill.-based Zurich north america says its important
for insurers to understand both the scope and the
limitations of modeling tools. Jones says the company
uses modeling products to inform its “Zurich view”
of catastrophe risk, which then feeds into many areas
within the company—from risk appetite assessment to
Photography by Paul Taylor/Getty Images
