Chapter 11: Catastrophe Models Flashcards
Catastrophe models
incorporate knowledge of: - seismology - meteorology - hydrodynamics - structural and geotechnical engineering to build a model.
5 inter-linked modules of a catastrophe model
- event
- hazard
- inventory
- vulnerability
- financial analysis
Perils modelled with catastrophe models can include, e.g. (8)
- tropical and extra-tropical cyclones
- tornadoes
- earthquakes
- hailstorms
- winter storms
- floods
- disease
- terrorism
Actuaries use catastrophe models to help with (5)
- aggregate modelling
- pricing
- capital allocation and assessment
- reinsurance purchase
- reserving
Catastrophe models need to allow for (4)
- frequency and severity trends
- approximations where necessary, for mathematical tractability
- data quality and quantity
- unmodelled events
4 Reasons why catastrophe models have become increasingly sophisticated with each successive iteration
- advances in computer hardware
- additional catastrophe events with more detailed exposure and loss data
- a greater number of accurate measurements of the physical characteristics of events
- greater transparency and co-operation between the insurance industry and experts in other fields such as seismologists, meteorologists, meteorologists and civil engineers.
Seismology
The study of earthquakes and their effects, e.g. tsunamis
Meteorology
The study of the atmosphere, and weather in particular
Hydrodynamics
The study of liquids in motion
Event module
A database of stochastic events with each event defined by its physical parameters, location and annual frequency of occurrence.
Hazard module
The module determines the hazard of each event at each location.
The hazard is the consequence of the event that causes damage.
E.g. in the case of a hurricane, wind speed is the primary cause of damage;
for an earthquake, it is ground shaking
Inventory (or exposure) module
A detailed exposure database of the insured systems and structures.
As well as location this will include further details such as age, occupancy, construction and number of storeys.
The model may also allow the user to put in more detailed information about a structure, such as information on roof anchors in hurricane models, or the presence of soft storeys in earthquake models.
The inventory module also contains the values of the buildings and contents that are to be insured. It is important to distinguish between these values and the insured limits.
Vulnerability module
Vulnerability can be defined as the degree of loss to a particular system or structure resulting from exposure to a given (level of) hazard.
The vulnerability module produces the modelled loss based on the values of the buildings and contents that are to be insured, not the actual insured limits.
It also models the loss arising from loss of use or business interruption arising from physical damage at the insured location.
These modelled losses are described as “ground-up losses”.
Financial analysis module
Uses a database of policy conditions (limits excess sublimits, coverage terms, etc.) to translate the total ground-up loss into a gross insured loss.
This module may also apply various types of reinsurance purchased to protect the portfolio.
Typically any facultative, risk excess of loss or proportional cover that insures to benefit the catastrophe excess of loss reinsurance is applied first, and then the catastrophe excess of loss is applied separately.
The financial analysis module allows the user to view the modelled losses from each of (4) perspectives
- ground up
- gross of all reinsurance
- net of facultative, risk excess of loss and proportional reinsurance but before applying the catastrophe excess of loss reinsurance
- net of all reinsurance
2 Categories of catastrophe models
- Aggregate models
- Detailed models
Aggregate catastrophe models
Here, detailed information on the exposed risks is not known.
Instead, aggregate exposures in an area are used in conjunction with industry average losses to estimate the likely losses.
This works well as long as the actual risks insured are representative of industry averages, for example, in terms of size and construction.
Detailed catastrophe models
Here, individual insured risk information is used and the likely loss for each insured risk is calculated, before summing to get the aggregate losses.
The primary factors to consider when deciding whether to use an aggregate model or a detailed model are cost and time.
Secondary uncertainty
Uncertainty about the exact amount of insured loss that a given event will cause, as opposed to uncertainty about which events will happen.
Which natural catastrophe perils are explicitly modelled under the South African SAM catastrophe module?
Hail and Earthquake perils at a 1 in 200 year return period.
3 windstorms typically considered separately by catastrophe models
- tropical cyclones (including tropical storms, hurricanes and typhoons)
- tornadoes
- so-called “straight line” wind, such as the windstorms typically seen in Europe
Tropical cyclones
Storm systems characterised by a large low-pressure centre and numerous thunderstorms that produce strong winds and heavy rain.
5 Categories of hurricanes
according to the Saffir-Simpson scale
1: 74-95 mph winds (some damage)
2: 96-110 mph winds (dangerous, extensive damage)
3: 111-130 mph winds (devastating damage)
4: 131-155 mph winds (catastrophic damage)
5: > 155 mph winds (hurricane Andrew - 1992)
