INFORMATION AVAILABILITY
Managing Risk with
Advanced Modeling
tangible risks and circumstances that occur
and linger long after. To help meet such a
challenge, risk managers are increasingly
adopting advanced catastrophe modeling and analysis to assess risk and make
informed risk management decisions more
effectively across the enterprise before,
during, and after catastrophic events.
Techniques
By GARY KERNEY, BILL CHURNEY & JIM LOVELAND
The term megacatastrophe has continued to gain prominence in the insurance and reinsur- ance worlds over the last few
decades. Typically used to describe the
havoc wreaked by major disasters such as
Hurricane Andrew in 1992 and Hurricane
Katrina in 2005, megacatastrophe has also
been used to illustrate the comprehensive
and devastating effects of the four hurricanes to strike Florida in 2004 that caused
billions of dollars in damage.
Another such event was Hurricane Ike.
A strong Category 2 storm when it struck
the Gulf Coast in September 2008, the
storm surge created by Ike was similar to
that generated by a Category 4 hurricane.
The storm’s remnants traveled north, carving a path of destruction from the Gulf
Coast through the Midwest and up to the
Great Lakes region. Property owners were
then left to clean up damages totaling billions of dollars from a storm many never
expected to reach them.
The consequences of such megacatastrophes are often far-reaching and unique.
In the aftermath of any catastrophic event,
underinsurance or a total lack of insurance
can prevent some homeowners and business owners from ever truly recovering.
The interruption or loss of jobs, local commerce, and tax revenues can worsen the
impact of adverse economic conditions.
Moreover, the widespread damage incurred
during a major disaster can drive up
demand for the labor and materials needed
to rebuild, leading to rising replacement
costs and longer construction timeframes.
Thus, risk managers are not only faced
with the daunting task of identifying and
planning for the physical risks of a catastrophe, but they must address those less
Advantages of
Catastrophe Modeling
Using the results of catastrophe
models, corporate risk managers can eval-
uate and implement various risk transfer
strategies to make cost-effective
decisions for their enterprises.
Furthermore, those risk manag-
ers who embrace the value of
catastrophe modeling are poised
to help advance their organiza-
tion’s competitive advantage.
Modeling can help risk
managers identify the effect of
extreme events as well as quan-
tify the amount of insurance
coverage necessary to suitably
protect the organization from
adverse financial, infrastructure,
and operational impacts. For
instance, sophisticated catastro-
phe models can simulate natu-
ral and man-made events (e.g.,
earthquakes, hurricanes, severe
thunderstorms, wildfires, acts
of terrorism, etc.) and overlay
those events on existing prop-
erty exposures. Models can then
determine the likelihood that
one or more events will result
in a potential loss, which risk
managers can use to decide how
much insurance coverage to buy,
what deductible level to
choose, and at what cost.
As a result, risk managers can align their
insurance coverage more
closely with their organization’s risk tolerance
level and avoid unnecessary coverage. Risk
managers may allocate
risk transfer dollars more
effectively by customizing their corporate risk
management programs
to reflect the realistic
A recurrence of the 1938 Great New England Hurricane
could generate more than $35 Billion in insured losses
(based on today’s exposures) according to AIR Worldwide.
Costliest catastrophes to hit the U.S. since 1950, as assessed by
ISO Property Claim Services. Considered megacatastrophes, these
fairly recent events indicate that even the costliest might be dwarfed
by potential future cat losses.
