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Why Don’t Cat Models Work or Do They?. The Role of Models: A View From Both Sides CAS Presentation May 8, 2006 Maria Kovas. Overview. Role of Modeling during the Quiet Years Original Role of Modeling Change in Expectations Return to the basics.

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why don t cat models work or do they

Why Don’t Cat Models Work or Do They?

The Role of Models: A View From Both Sides

CAS Presentation

May 8, 2006

Maria Kovas

  • Role of Modeling during the

Quiet Years

  • Original Role of Modeling
  • Change in Expectations
  • Return to the basics

During the Quiet Natural Catastrophe Years

Leading Role in:

Reinsurance Pricing


Primary Pricing

Business Planning

Post Event Loss Evaluation

original role diagnostic device
Original Role:Diagnostic Device
  • Distribution of Exposure
    • Identification of High Density Areas
    • Review of Adjacency of Risk in Key Peril Areas
    • Consideration of Redistribution of Exposure
identification of drivers of risk
Identification of Drivers of Risk
  • Review of PML in Modeled for Modeled Perils
  • Application of Secondary Peril information
    • Modeled
    • Un-Modeled
consideration of data quality and the impact on the diagnostic process
Consideration of Data Quality and the Impact on the Diagnostic Process
  • Inclusion of additional sublimits and deductibles
  • Identification of more building characteristics
  • Cost Benefit analysis of modifying systems to update the data
  • Determination of Business/Underwriting Goals
  • Review the current position of the organization
  • Chart the differences and devise options to achieve Goals
  • Periodic review and updates of movement in the process
catastrophic response
Catastrophic Response
  • It is not possible to plan for a Catastrophe
  • It is possible to evaluate event curves
  • Event drills
    • Deployment of claims teams
    • Setting management expectations
factors contributing to the change in expectations
Factors Contributing to the Change in Expectations:
  • Peril Modeling vs. Total losses
  • Second Generation Modelers
  • The Quiet Period
  • Data Issues
  • Updates to methodologies
peril modeling vs total losses
Peril Modeling vs. Total losses
  • Models are based on specific perils
  • Review of actual events to calibrate model outputs
  • Quiet period limited the number events for calibration
  • Actual losses are based on all affected perils
second generation modelers
Second Generation Modelers

First Generation-Professional insurance/broker/reinsurers-recruited to use the models because of aptitude or interest

Second Generation-Professional modelers recruited for technical aptitude and skill in running the models

the quiet period
The Quiet Period
  • Modeling became the sole focus of loss estimates
  • Comfort level because losses were within a tolerable variance
data issues
Data Issues
  • Models capable of refinement with additional data points
  • Data capture may be not updated to match the capabilities of the models
  • Valuation issues
  • New financial structures
updates to methodologies
Updates to methodologies
  • New interpretation of historic data
  • Updates to the science used in the models
  • Changes to the methodology
  • Re-calibration of models and vulnerabilities
re establishing the role of modeling
Re-establishing the Role of Modeling
  • Model data as Currency
  • Return to the basics
  • Ensemble Reporting
  • Setting expectations
model data as currency
Model data as Currency:
  • Definition of the data coin
    • A data formatted in such a manner to be shared among industry business interests
    • Standard evaluation of the data coin determine the confidence in the data
    • Confidence in the data leads to rate considerations
return to basics
Return to Basics
  • Underwriting Cycle
  • Review Reporting provided to management
  • Recreate event drills
  • Refresh training
  • Update data capture and interface
ensemble reporting
Ensemble Reporting
  • Create Multiple Views of Exposure
  • Model what is available
  • Identify and communicate gaps
  • Evaluate Secondary Perils
  • Use Mapping

Anticipate questions

Consider key issues in the firm

Review the diagnosis

Determine if the remedies are cost effective