Karen Clark has had an interesting career path. A pioneer in the catastrophe modeling business, she sold her own firm eight years ago, but now essentially makes her living warning people about what cat models can't do–which is replace human judgment. But have insurers gotten the message?

Our latest article on this subject appeared in NU's Feb. 22, headlined “Are Insurers Too Dependent On Catastrophe Modeling?” (You may access the piece by going to http://bit.ly/chMiSI.)

NU's Phil Gusman interviewed experts in the field, and what he found is very comforting, yet scary. Models are a terrific tool to help red flag any potential over-concentration of risk, but they are no substitute for the knowledge, experience and even intuition of human underwriters.

Phil reported that in Ms. Clark's view, as he put it, “models are not absolute truths, but rather tools that offer generalized best estimates. They can contain uncertainties, limitations and even inaccuracies, she warned, insisting they are not designed to replace underwriters or be the final word on which risks are acceptable to an insurer.”

I think insurers generally get that message. I don't know of any who have handed over all their decision making to a piece of software. They realize underwriters can be myopic, and perhaps lose sight of the bigger picture. Cat models can help a company better visualize its overall exposure, and underwrite and price accordingly.

Cat models have been around for a decent amount of time now, and I believe insurers realize their limitations, as well as their advantages.

Still, insurers cannot afford to forget that any model is only as good as the data people put into it. Garbage in, garbage out, right?

If you want proof, consider that one of the modeling vendors told NU that after Hurricane Katrina, some insurers learned–to their chagrin–that Mississippi structures listed as concrete hotels during data input turned out to be floating casinos. The difference in the respective exposures, obviously, is huge.

What do you folks think about cat models? Feel free to share your thoughts, experiences, expectations and frustrations.

Special Reports /

Cat Model Got Your Underwriters?

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