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Two weeks ago, I had the pleasure of speaking at the Australia’s first catastrophe risk management and modeling conference, which brought together all Australian modeling firms, brokers, and insurance companies in one place.

As in other insurance markets around the world, new regulatory directives are bringing increased focus on in-house understanding and ownership of risk, and in Australia specifically driving at board-level understanding of catastrophe model strengths, weaknesses, and associated uncertainties.

As I commented in a previous post, the ability to embrace model uncertainty and make decisions with awareness of that uncertainty is helping build a more resilient insurance and global reinsurance market, able to survive episodes like the record losses posted in 2011.

A.M. Best considers “catastrophic loss, both natural and man-made, to be the No. 1 threat to the financial strength and policyholder security of property and casualty insurers because of the significant, rapid, and unexpected impact that can occur. And simultaneously that the insurance industry overall has been trending toward a higher risk profile.”

They believe “that ERM—establishing a risk-aware culture; using sophisticated tools to identify and manage, as well as measure risk; and capturing risk correlations—is an increasingly important component of an insurer’s risk management framework.”

Catastrophe models, used appropriately, will continue to grow in importance as the only tool realistically able to help insurers and reinsurers understand their possible exposure to future catastrophic events. But we must always remember that models are the starting point, not the end point.

A topic of debate at the Australasian catastrophe risk management conference was whether “foreign adapted” models can be relied upon as much as “local” models to represent the risk accurately. The truth everywhere is that global catastrophe experience is much greater than local catastrophe experience in any particular country, and this is the case for Australia, particularly if we look at earthquakes or tropical cyclones.

The ideal model is one that blends that global experience and learning and adapts it where relevant to local conditions, working with local scientists and engineers to ensure that its accurately tuned to the physical and built environment.

We recognize that different perspectives exist, and that each insurance and reinsurance company needs to take direct ownership of understanding the different views of the risk that are available, and deciding which is most appropriate to use for their business. The ability for modeling firms such as Risk Frontiers to make their suite of Australian catastrophe risk models available on RMS(one), as announced at Exceedance 2013 will facilitate the ability for insurance and reinsurance companies to achieve this goal.

With the world’s population continuing its inexorable rise, and with more and more people and industries situated in hazardous places around the globe, the insurance industry can only expect its risk exposure to continue to increase.

Increasing the global availability of multiple model views will give rise ultimately to both a bigger community of model developers, and a more informed industry, with in-house expertise in catastrophe models and risk to support this global population and economic growth.

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May 02, 2014
A Commitment to Model Development and Open Models

During Exceedance 2014 last month, we demonstrated that RMS(one) is a truly open risk management platform. At the event, RMS clients were the first in the industry to analyze the same exposure data sets with models from multiple providers on the same platform. Adding support for third-party models enhances what we can offer to our clients in addition to our own commitment to model development. RMS is adding more countries and perils to our existing portfolio, which covers 170 countries and perils, and our model development team has grown by 25 percent over the past two years. Our motivation is to deploy science and engineering for real-world application to address the industry’s challenges. We see new opportunities arising for the risk management industry as the world’s population, industrial output, wealth, and insured exposure continue to climb each year. However, these changes are resulting in increasing risk profiles for insurers, reinsurers, the capital markets, and beyond. Our modeling team has galvanized around the RMS(one) platform to take advantage of all of the capabilities that can now be incorporated into catastrophe models. Here are a few examples of the work underway: Our flood modeling team is deploying graphics processing units (GPUs) to extend our hydrodynamic ocean storm surge modeling capabilities around the globe. We are applying this technology to the modeling of tsunami propagation across oceans. We are doing new research to understand which earthquake sources may generate magnitude nine or greater earthquakes, as well as to identify what exact combinations of factors caused the severe liquefaction seen in some areas of Christchurch, where else this might occur, and how this can be linked to building damage. In the world of tropical cyclones, we are learning new things about transitioning storms in Asia and how they impact wind patterns—and therefore risk—across Japan. We are building high definition (HD) industrial exposure databases to complement risk analysis. Our modeling teams are enthused by providing transparency about where uncertainties remain in the models and giving control to clients; users are able to create their own custom vulnerability curves and incorporate their own view with other aspects of models on RMS(one). Not only is RMS(one) an open platform; RMS models will be open. For example, users of our future flood models will have the option to enter their own intelligence on flood defense locations, build their own vulnerability curves based on site engineering assessments, or to sensitivity-test the impact of defense failures at both a location and portfolio level. Additionally, our clients will be better able to understand, write, and innovate new policy terms in the future. As an example, we have recently seen the loosening of terms and conditions around hours clauses for flooding at this year’s January renewals, as reinsurers responded to the competitive pressures posed by the influx of alternative capital. But this is being done without really knowing what those changes can have on a company’s risk profile. Future HD flood models on RMS(one) will allow companies to do so. These are just a few of the initiatives underway as we continue our ongoing quest to bring science, engineering, and technology together to solve real-world problems. …

Claire Souch
Claire Souch
SVP, Business Solutions, RMS

Claire leads the models & analytics solutions group at RMS, responsible for guiding the industry’s understanding and usage of catastrophe models, identifying market trends and future needs, and informing RMS’ model development and communication strategies. In this capacity, Claire and her global team interact frequently with clients, regulators, and rating agencies to educate and advise on topics such as model roadmap, uncertainty, and appropriate usage. She is a member of multiple industry task forces and advisory boards, and frequently speaks at industry events. Prior to joining RMS in 2000, Claire completed 3 years post-doctoral research. Claire holds a BSc in environmental biology and a PhD in surface water modeling from Cranfield University in the UK.

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