Technology Advances In Cat Modeling Help Create More Masters Of Disasters

Recent years have shown extreme events as well as an increased frequency of disasters that had previously been considered remote.

The "grand slam" of four land-falling hurricanes in 2004, followed by the record-setting Hurricane Katrina losses in 2005, emphasized how important models are to insurance risk-taking strategies.

Whether as a result of major losses or other factors, many large insurance carriers may choose to reduce their portfolios of catastrophe exposure.

There are also less obvious factors that have a significant influence on the proliferation of cat modeling.

After the hurricanes of 2004 and 2005, rating agencies made significant changes to the way they view catastrophe exposure.

In response to the events, insurance company rating agencies altered their capital adequacy models, placing a stronger emphasis on carriers' ability to withstand major and multiple catastrophe events.

Also, the cat modeling firms provide alternative views of hurricane frequency. The hurricanes generated a large body of data to test, validate/invalidate and alter the inner working of the catastrophe models.

Another factor fueling the use of cat modeling is that the models themselves have improved over time. Year after year, cat models are recalibrated and some aspects, such as geocoding, have improved substantially.

There is also finer resolution for single risks. Integrated mapping and satellite imagery portray results graphically, not just numerically, generating results that are more user-friendly and helpful for underwriting purposes. Newer models are being developed to address hazards not previously contemplated.

Evolving technologies have opened the door for more frequent usage. The continued reduction in cost per cycle has made the adoption of modeling more feasible.

Years ago, it required a significant hardware investment just to run the models. Furthermore, the run-time for model completion was quite long.

Today, the hardware investment is minimal for initial modeling, and Web-based solutions have no hardware costs. Instead of installing models, these new applications allow users to visit a secure Web site, input risk information and receive results in a Web browser.

There is also a growing tendency toward service orientation in application development. This allows cat modeling information to reach software systems as a programmatic input.

Information technology departments and software development teams can access modeled output via Web services and use that information in any fashion.

For example, coastal property exposures written on a surplus lines basis can be rated in real time by integrating a Web services application programming interface into a traditional rating engine.

This provides a dynamic rate based on location, risk characteristics, coverage, deductibles and any other relevant model information.

In recent years, two significant trends have emerged.

o First, there is the ability of audiences outside of insurance risk-taking entities and the reinsurance brokers serving them to use cat modeling.

o Second, cat modeling can be implemented in ways not previously contemplated.

New audiences can use cat models to improve their ability to underwrite higher-margin property portfolios.

With the combined effect of rating agency pressure on capital and amplified modeled losses, many carriers may apply pressure from all angles to ensure property risk is properly underwritten and priced.

This could drive many managing general agents, retail brokers and other distributors to integrate cat modeling into their origination procedures.

While this pressure to implement may increase, it could also provide the impetus to create technology solutions that will serve the new needs of catastrophe models.

As the need for per-risk underwriting and pricing tools has intensified, technology solutions have been created to reduce the effort required to use the catastrophe model output in everyday underwriting situations.

Underwriting scoring solutions have been developed to comprehensively integrate the financial impact of a potential property risk to a given carrier's current or expected future exposure.

The integration of cat modeling into the mainstream underwriting process is here to stay. The technology continues to evolve, making modeling easier and more cost-effective than ever before.

The ability to receive user-friendly results at the touch of a button is gaining popularity, especially among smaller companies.

Therefore, the use of cat models will continue to be a driving force in the foreseeable future, bringing the power of improved portfolio risk management to a broad spectrum of new users.