Are Insurers Too Dependent On Catastrophe Modeling?

Are insurance carriers putting too much weight on the results of catastrophe models in underwriting risks and managing their concentration of exposures? Have insurers allowed rating agencies and reinsurers to bully them into an overreliance on the models, and do users understand the uncertainties inherent in such predictive analytics?

Those are some of the critical questions that have been raised over the past couple of years by one of the pioneers in the cat modeling industry–Karen Clark, founder of the first catastrophe modeling firm, Applied Insurance Research (which later became AIR Worldwide Corp., after its acquisition by the Insurance Services Office in 2002).

Ms. Clark is currently president and chief executive officer of Karen Clark & Company in Boston, a consulting firm that helps companies with risk management processes, including interpreting and using cat model results.

This is not a new controversy, but it is one that has yet to be settled. Indeed, as far back as April 2008, Ms. Clark, speaking at a gathering of the Association of Professional Insurance Women in New York, said the industry had grown too dependent on cat models and “stopped thinking about risks independently.”

She stressed that models are not absolute truths, but rather tools that offer generalized best estimates. They can contain uncertainties, limitations and even inaccuracies, she warned, insisting they are not designed to replace underwriters or be the final word on which risks are acceptable to an insurer.

Catastrophe modelers that spoke to National Underwriter agreed their products and systems are essentially support tools.

Explaining his view of what models can do for insurers, Jayanta Guin, senior vice president of research and modeling at AIR Worldwide, said that “models provide a robust framework to determine, ‘What is risk?'” He said the models help give an insurer a full probabilistic view of its exposure, and act as a tool to help the company make a determination on how to minimize risk. Models have also “introduced a standard into the industry where everyone is speaking the same language,” Mr. Guin added.