The Lloyd’s Market Association has published a new guide on catastrophe modelling in response to the increasing use and complexity of today’s cat models.
The trade body’s new guide focuses on uncertainty in catastrophe modelling and is aimed at anyone who relies upon cat models but does not have a detailed understanding of the uncertainty contained within them.
Ken Curtis, LMA finance and risk director, described the new guide as an “invaluable tool” to the association’s members and the insurance market.
“As our reliance on and the sophistication of catastrophe models grows, so does the level of uncertainty inherent in the models,” Curtis said.
“Few outside the cat modelling industry are fully equipped to recognise this, and the consequences it has on assessing and pricing risk,” he added.
The guide explains the five main reasons for uncertainty within cat models, which are:
- non-modelled losses: which can result from regions or perils not included in the modelling assessment, risks that are not considered by a model, or missing exposures
- exposure data: the accuracy of the cat model is reliant on the quality of its input data
- event frequency: historical data on catastrophe is limited and is not always a reliable guide to what events may occur in the future
- risk vulnerability: catastrophe risks may have several different characteristics, such as wind damage and flood, insured risks may have different vulnerabilities to these hazards
- financial calculations: translating risk and frequency into possible claims value and volume
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