To be Solvency II compliant, re/insurers must validate the models they use, which can include comparisons to historical loss experience. In working towards model validation, companies may find their experience of European windstorm hazard does not match the modeled loss. However, this seeming discrepancy does not necessarily mean something is wrong with the model or with the company’s loss data. The underlying timelines for each dataset may simply differ, which can have a significant influence for a variable peril like European windstorm.
Most re/insurers’ claims records only date back 10 to 20 years, whereas European windstorm models use much longer datasets – generally up to 50 years of the hazard. Looking over the short term, the last 15 years represented a relative lull in windstorm activity, particularly when compared to the more extreme events that occurred in the very active 1980s and 1990s.
RMS has updated its European windstorm model specifically to support Solvency II model validation. The enhanced RMS model includes the RMS reference view, which is based on the most up-to-date, long-term historical record, as well as a new shorter historical dataset that is based on the activity of the last 25 years.
By using the shorter-term view, re/insurers gain a deeper understanding of how historical variability can impact modeled losses. Re/insurers can also perform a like-for-like validation of the model against their loss experience, and develop confidence in the model’s core methodology and data. Alternate views of risk also support a deeper understanding of risk uncertainty, which enhances model validation and provides greater confidence in the models that are used for risk selection and portfolio management.
Beyond Solvency II validation, the model also empowers companies to explore the hazard variability, which is vitally important for a variable peril like European windstorm. If a catastrophe model and a company rely on different but equally valid assumptions, the model can present a different perspective to provide a more complete view of the risk.