Comparing Cats & Dogs

One of the shockers for me in attending last week's ACORD London Forum was learning about the lack of standardization when it comes to working with catastrophe models. I was also surprised to hear that many companies work with multiple models to hedge their bets. It sounds like the industry is still dealing more with wishful thinking than hard science when it comes to their biggest exposure.

ACORD has a number of players participating in a standards-setting initiative on catastrophe data, but panelists at last week's forum lamented that not everyone is on board.

“It is very important that all model vendors are in the boat. Not all of them are at this point,” noted Peter Hausmann, head of research and development for catastrophe perils at Swiss Re Group. During an ACORD panel on “Addressing the Challenges of Cat Exposure Reporting,” he added that “with more carriers using multiple models to price their risks, we need data standards to assure we are comparing apples to apples.”

Paul Nunn, manager of the loss modeling unit at Lloyd's, added that because his is a subscription market, with the same risk being shopped to many syndicates, “you have 20-to-30 teams doing the same scrubbing to clean up the data. It's a terrible waste of time and resources. We're looking to drive out some of that cost for thankless tasks and standardize data to allow time to be better spent analytically.”

On the other hand, Mr. Nunn warned, “we have to be mindful to be flexible because the reason our spreadsheets are so messy is that there is a lot of data that might not fit neatly into any category. We don't want to constrain underwriters or deny them relevant information.”

I still came away from this session quite alarmed, and was not relieved after speaking with a number of underwriters in attendance following the panel session about their use of cat models.

For those using multiple models so they can provide their boards with a range of worst-case scenarios, again, it sounds more like reading tea leaves than actuarial predictability. The underwriting department is desperate for some quantitative measurement so they can reassure their managers and board members that they have their catastrophe exposures under control.

But I was even more alarmed to encounter a number of underwriters whose firms rely on only one cat model. It seems clear that the various models often conflict–thus providing a “range” of potential losses for those using multiple systems. (If all the models came up with the same numbers, there would be no need to use more than one–you would just pick one according to the best cost and service offered, right?)

If you only go with one, how do you choose which to believe? You are literally betting your company's solvency on the outcome.

In any case, it seems like a no-brainer to me for everyone involved to get on board with the standards effort here. If you can't believe or compare your numbers, it makes it that much harder to come up with any definitive answers on exposure. Garbage in, garbage out, right?

However, much like the ongoing battle to convince all carriers to jump on the SEMCI bandwagon (that's single-entry, multi-company interface), so that independent agents don't have to do multiple data entry to shop their risks, it doesn't surprise me that some will hold out against standardization of their business.

Attendees told me some fear that cat data might become commoditized, making their particular product less “valuable” (translation–too costly, or perhaps no longer even viable), while lowering the entry barriers to new players.

Still, I can't see this particular standards drive being held up for years, the way SEMCI has remained more of a Holy Grail than a reality. It just makes too much sense, and cat exposures are just too big to leave to chance.

Sounds like a no-brainer to me. What do you folks make of all this?