Cat Modeling, Forecasting Tools MoreSophisticated

From terrorism-risk analysis to hurricane modeling, catastrophemodeling and forecasting tools are becoming ever more sophisticatedto help carriers make informed decisions.

Major insurers are seeing significant changes, especially in thearea of catastrophe modeling. Previously a specialized serviceconducted by experts, CAT modeling is now being integrated intomore mainstream business processes, some industry observers say.The following are some of the new forecasting software products andmodeling technology developments announced in the past year.

Risk Management Solutions, based in Newark, Calif., is offeringproducts that can help insurers with the new Supplemental RatingQuestionnaire (SRQ) for terrorism risk issued by A.M. Best Companyin 2004. In the questionnaire, insurers are asked to show whetherthey use a terrorism model to quantify their risks and also showtheir risk accumulation within key target locations. Carriers arealso asked to report their largest levels of risk accumulation inany one four-wall structure and model their losses for variousterrorism attack scenarios.

“SRQ is a very interesting developmentits main questions aresomething clients have all been focused on since Sept. 11,” saidPaul VanderMarck, executive vice president at RMS. Mr. VanderMarckobserved that there has been a lot of attention paid since Sept. 11to understanding very precisely where insurers place business. Themost obvious implication is for the terrorism risk,” he said, “butalso there has been recognition that basic concepts of managing theaccumulation of exposures are also relevant more broadly.”

Mr. VanderMarck said that using an RMS product called“RiskLink,” insurers can perform a wide range of terrorism-riskanalyses. For instance, insurers can identify their “at risk”locations using the RMS target list, which was developed with helpfrom global experts on international terrorism.

With RiskLink, insurers can also quantify multi-line exposureaccumulations within buildings, using high-resolution data forurban areas developed with The Sanborn Map Company. RMS saidclients can automatically locate a company's top five multi-lineexposure accumulations using a search algorithm, and also locate acompany's top five multi-line terrorism loss scenarios using 32different terror attack modes. Other features include thecalculation of exposure accumulations and loss estimates for arange of financial bottom linessuch as gross loss, net loss afterreinsurance and net loss after TRIA recoveries.

RMS Chief Executive Hemant Shah noted, “The SRQ also recognizesand highlights the fact that property and workers comp losses canbe highly correlated in a terrorism event and thus must be managedaccordingly.”

Separately, RMS also introduced last year the third generationof its U.S. Hurricane modelit is the first such model to fullyrepresent the physical processes of hurricanes that impact theUnited States, according to the firm. The upgraded model includesnew research into what are called “transitioning storms”storms thatbehave differently from pure hurricanes, with distinctiveimplications for loss estimates. RMS said its model works as both ahurricane and a transitioning storm modelthe first of its kind inthe CAT modeling industry.

Using improvements in hurricane data and research over the pastfive years, the RMS U.S. Hurricane model uses ultra-high resolutionmodeling techniques on storm behavior and building vulnerability.The model, RMS said, uses “an event-generation methodology” tosimulate hurricane events throughout their entire life cycle,determining loss correlations for storms that strike more than oneregion.

RMS also pointed out that the models hurricane windfields areupdated constantlycalculated at 15-minute time intervals along thestorms path, using factors such as changes in wind direction,upwind surface roughness and intensity as a storm passes. Lossesfor both wind and surge are calculated and even differentiatedbased on state-level differences in building code requirements andenforcement.

“Traditionally, hurricane models have been unable to adequatelyexplain historical losses in the Northeast, which were consistentlylower than expected using standard hurricane windfields,” saidRobert Muir-Wood, managing director of global risk modeling at RMS.He said most hurricanes approaching U.S. northeastern coastalregions are transitioning types. “These storms exhibit differentcharacteristics from hurricanes. The new research at RMS on theimpacts of extra-tropical transition will change how companiesunderwrite and manage hurricane risk, particularly in thenortheastern U.S.”

Prices for RMS products vary based on what parts of theapplications are licensed. “Our clients pay anywhere from severalhundred thousands dollars to several million, depending on thescale of the relationship,” Mr. VanderMarck said.

AIR Worldwide Corporation, a unit of Jersey City, N.J.-basedInsurance Services Office Inc., is offering its clients updatedservices and software for its catastrophe models. Boston-based AIRobserved that the application of CAT modeling by major insurers isundergoing a significant change. CAT modeling, the firm said, haspreviously been a specialized service conducted by experts. Butnow, it is being incorporated more into mainstream daily businessprocesses and is added into underwriting software applications.“This is happening across multiple lines of business, includingworkers compensation and life,” according to AIR.

The firms two recent developments introduced to the marketplacein the past year are CATStation and CATools. “CATStation wasintroduced in the summer of 2003. CATools was introduced in 2002and was first implemented successfully with ACE Limited at the endof last year,” said Uday Virkud, senior vice president at AIRWorldwide. “These products are new additions to the family ofproducts that we have. CATStation is an extension of our detailedmodeling solutions and it is designed for complex, large companiesthat write multiple lines like property, workers' comp andlife.”

Mr. Virkud explained that the Sept. 11 event brought to theforefront for many companies that there were “aggregations andaccumulations” of exposures. “For example, a company might beinsuring the property of a building but also write workers' comppolicies with employees working in that building, and also lifeinsurance policies on top of that. So together, there could bemultiple losses,” he said.

Mr. Virkud added that CATStation, designed to work in tandemwith AIRs desktop software CLASIC/2, allows more flexiblereporting. Losses, he explained, can be reported on an annualaggregate and occurrence basis, by location, portfolio, peril orother user-defined criteria. It also allows insurers to manageevery aspect of their catastrophe risk in one application andanalyze risks from the portfolio level down to underwritingdecisions for individual policies. CATStation uses three modules:Exposure Concentration Analysis, Hazard Analysis and LossAnalysis.

The Exposure Concentration Analysis component provides ageographical analysis of clients existing exposure concentrationsand finds out whether they meet clients underwriting guidelines, hesaid. Clients can analyze, in real time, their approximate exposureto likely terrorist targets. The impact of new policies on anexisting portfolio can also be studied, as can overall exposureconcentrations at the enterprise level or down to the singlemulti-location policy level.

The Hazard Analysis module offers critical catastrophe andproperty risk information. Its designed to provide peril-specificcharacteristics of the property location, such as storm-surgepotential, distance to nearest active fault and Public ProtectionClassification, as well as risk scores. Clients can simply inputthe property address to standardize and geographically code thelocation, AIR said.

The Loss Analysis module helps insurers to assess thecatastrophe loss potential of individual risks, policies andportfolios of policies, the company noted. Utilizing detailedexposure information on each location and policy, this moduleassists in individual risk selection and pricing decisions.

CATStation also allows insurers to combine catastrophe riskinformation with their corporate guidelines. In combination withAIRs CLASIC/2 software, insurers can run full portfolio-levelanalysis and study their options for reinsurance, said AIR.CATStation is a browser-based system that can be fully integratedwith an insurers in-house underwriting system or operate as astand-alone product that can be networked anywhere throughout aclient's underwriting units.

CATools, the other upgrade introduced by AIR, is an applicationprogramming interface that brings a full integration to insurers:direct access to CAT models from the insurers proprietaryunderwriting system. It can be used to integrate catastrophemodeling into the mainstream business processes within insurancecompanies.

Mr. Virkud said the pricing for CATStation and CATools is basedon “the extent of the implementation of these applications for thecompany and the size of the company.”

Willis Re, the reinsurance unit of London-based broker WillisGroup Holdings, offers a risk-modeling service for its clients thatevaluates property-casualty exposures in an underwriting portfolio.First introduced in May 2003, Willis Concentrated RiskLocationsalso called Willis Ctrlhas been developed to identifyexposures from perils that are local in their immediate effect,such as terrorism, hail, tornado, fire and flood, but global in alonger-term impact, the firm said. In addition to recognizingexposed locations, total exposures and potential total losses canbe estimated, taking into account relevant policy conditions orloss limits.

Clients can specify an area of interest, such as a city, andWillis Ctrl can scan the portfolio for physical concentrations ofrisk using a “clustering algorithm.” Insurers can also choose aspecific point, such as a high-profile building, and studyexposures within a specified radiushalf a mile, for example, saidWillis. The service can also calculate exposures within ageographic area, such as a county or zip code, across multipleclasses and lines of business.

“This is another great opportunity to provide added valueservice to help clients make better management and underwritingdecisions,” said Julie Serakos, senior vice president ofcatastrophe-management services at Willis Re and the U.S. leader onthe Willis Ctrl project.

“The benefits of Willis Ctrl will help our clients effectivelyevaluate perils and exposures which have traditionally beendifficult or expensive to quantify. It provides a new dimension tothe understanding of risk in major areas of concern.”

As for the pricing, “this service is primarily available to ourreinsurance clients, so the cost is included within our clientrelationships,” Ms. Serakos said. Currently, there are some 50primary insurers that are utilizing Willis Ctrl in theirrelationships with Willis Re.

In the personal-financial analysis area, TransUnion andConvergence Data LLC, both based in Chicago, are offering a servicecalled Loss Improvement Forecasting Tool (LIFT) to personal-lineinsurers. It works with TransUnion's credit-based insurancesoftware to help insurers better assess risk in underwritingpolicies.

Kevin Coghill, vice president of TransUnion, said it offersinsurers an additional tool to make more informed underwritingdecisions. “Just like credit report variables, LIFT datademonstrates a strong correlation to loss. This additionalinformation can lead to underwriting action that will make a soliddifference in how the book performs,” Mr. Coghill said.

LIFT data, which is compliant with the Fair Credit ReportingAct, combines information from TeleCheck, acheck-verification-and-guarantee company, and Teletrack, asub-prime consumer-credit database. These data sources, thecompanies said, contain information on consumer-financial behaviorsimilar to that of credit-reporting companies. LIFT can helpprotect insurers from adverse risks and reduce losses by furtherrefining credit-based insurance score ranges.

Gregg Antenen, a partner in Convergence Data, said, “Clearly,more and better information can produce better underwritingdecisions on more applicants, and that's the purpose of LIFT.Through our relationship with TransUnion, we will be able todeliver LIFT seamlessly into an insurer's application processingsystem alongside traditional credit data.”

No pricing information was provided.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, February 20, 2004.Copyright 2004 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.