Lockton: Holes in Models Exposed by Superstorm Sandy

Catastrophe models will continue to be exposed by events like Superstorm Sandy because they can fail to contemplate all possible sources of loss, says Lockton Cos.

A report by Jeff Tennis, manager of catastrophe analytics at Lockton, says model deficiencies are visible “particularly for areas with a limited historical record,” but he adds it “would be naïve to fully discredit” these loss-prediction tools.

Tennis suggests simulations using the hurricane model by Risk Management Solutions (RMS) were not lacking in that the firm modeled 2,300 storms in the area where Sandy hit and 62 storms produced storm surge of 16-feet or greater—the surge height in some areas during Sandy, such as on Staten Island, N.Y.

However, Tennis says, the simulated storms to produce such a surge in the model were a Category 3 or greater. Sandy was a Category 1, and made landfall as a tropical storm.

"RMS claims its model represented Sandy's storm surge reasonably well, but has provided few details supporting this claim," Tennis says. 

Additionally, inland flooding in not captured by the RMS model, Tennis adds.

The models also miss the mark on indirect losses such those related to business interruption, which, in an area like New York, is a big driver of loss—maybe more so than direct losses.

The point is not that the models are useless. Tennis says models “are still a useful tool to evaluate ‘how bad bad can get.’”

The point is insurance professionals, “must recognize model deficiencies and supplement where needed.”

Read Tennis’ report HERE.

RMS says insured losses from Sandy will be between $20 billion and $25 billion. In a December interview with PC360, the modeler says Sandy verified its model’s approach to estimating damages from wind and from storm surge.

Catastrophe modelers AIR Worldwide and Eqecat also released insured-loss estimates from Sandy. AIR raised its estimate of insured losses from Superstorm Sandy to between $16 billion and $22 billion after releasing a much lower range very soon after the storm. Eqecat says insured losses will total $10 billion to $20 billion.

Industry executives and analysts have since predicted insured losses will at least reach the high end of RMS' estimate, if not exclipse the prediction.

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