Whenever disaster strikes there is a natural desire to understand the extent of damage and cost implications as well as the scale of human tragedy.

While it may take many months before the full extent of insurance claims are known, the (re)insurance industry, analysts and regulators are keen to know asap how badly each company has been impacted. To fill the information void, the big three catastrophe modelling companies scramble to publish real-time loss estimates based on their proprietary model technology and their view of industry exposure. 

But why? Why do they take the enormous downside risk of getting it wrong when there is so much uncertainty pre-landfall and in the first few days following a hurricane event? There is a grave danger of misinforming clients as well as giving cynics license to engage in a bit of model-bashing if they miss the mark.

The answer: they have to. 

First, Real-time loss estimation has been sold as a product feature, targeting both buyers and sellers of Live Cat protection.  Also, supporting certain Insurance Linked Security (ILS) transactions commits model vendors to developing event windfield footprints, damage and loss estimatesto synthetic industry data.

So how well do they do? Naturally all will tell you that they do better than the others! AIR Worldwide feel sufficiently pleased with their performance in Ike that they have released a report comparing their model estimates with the latest figures from PCS. 

Personally, I think Ike demonstrates precisely why model companies should resist the rush to publish early loss estimates.

First, damage to offshore energy interests was unusually high considering the Saffir Simpson cat 2 classification that Ike had, not to mention the enormous scale of the windfield. We have learned from Katrina and Rita that it also takes a while to fully appreciate the extent of claims for damage to subsea interests.

Second, none of the ‘hurricane’ models extend far enough inland to generate meaningful losses to Ohio in the way that Ike did (over $1bn and counting).

Unlike some of the experience of model usage in the banking world, the insurance industry  has benefitted enormously from disciplined adoption of catastrophe modelling technology to support portfolio and capital management. Unfortunately real-time loss estimation is not where the models add real value.

Tags: AIR, cat models, Ike, PCS

This entry was posted by Paul Nunn on Wednesday, February 25th, 2009 at 1:59 pm and is filed under Exposure Management.