Use of Catastrophe Models

Question 1

Differences between Catastrophe modelling and traditional rating (5).

Answer 1

• Traditional rating works for high frequency, low severity. CAT modelling is for low frequency, high severity.
• For CAT, observed losses may not reflect true underlying risk.
• The return period is large e.g. 250 year return.
• Uses computing power and Geographical Information Systems.
• Most models in infancy stage. Increase in sophistication in short time.

Question 2

CAT modelling: Approach

Answer 2

• It starts with historical events but applys a longer timescale ( decades or
  century)
  -The model uses past experience and scientific understanding to create possible future events and stochastic event sets ( never happened).
  -The model calculates the effect of events on the insured portfolio.

Question 3

Basic structure of CAT models (5).

Answer 3

1. Event module- details of stochastic events defined by physical parameters, location and likelihood of occurrence. Based on seismological and meteorological assessment. Uncertainty: incomplete event set, missing extremes, ENIDS etc
2. Hazard module- determines the hazard of each event at each location. The hazard is the consequence of the event. E.g wind speed ( hurricane) , ground shaking ( earthquake). Based on seismological and meteorological assessment. Uncertainty: errors in hazard model e.g low wind speed
3. Inventory / exposure module- details of insured’s risk and risk factors e.g location, age, occupancy, occupation. Rely on input data specific to the user of model. Uncertainty: user error in exposure or incomplete
4. Vulnerability module- degree of loss to a structure resulting from exposure to given hazard -% of TSI. Based on engineering assesment. Uncertainty: under/over estimate losses e.g construction types respond differently, demand surge not modelled
5. Financial analysis module- Uses database of policy conditions (limits, excess )to translate the total ground up loss to insured losses. Rely on input data specific to user of model. Uncertainty: coverage not correctly modelled e.g excluding flooding

Question 4

Perils modelled under CAT

Answer 4

1. Hurricane
   - US, Carribbean, N Europe, Japan, Far East and Latin America.
2. Earthquake
   - US, Japan, Canada, S Europe, Mexico and Indonesia.
3. Others- tornado, hail, river flood , wild fire etc.
4. Non natural/ man-made
   - Terrorism models
   - Deterministic module- maximum expected loss from different terrorist attack.
   - Or stochastic module

Question 5

Infectious Disease modules

Answer 5

• recently developed
• Assumptions-needed on changes in demographics, ease and frequency of travel and improvement on medical care.
• not commonly used

Question 6

Parameters for Hurricanes in event set.

Typhoons and cyclones

Answer 6

• Track (path hurricane follows)
• Maximum sustained speed
• Storm radius
• Forward speed
• the rate of decay of the wind field

Question 7

Parameters for Earthquake within event sets.

Answer 7

• the moment magnitude (measuring energy release)
• Focal depth - shallow faults are more damaging
• total area of fault rupture
• fault type - convergent plate high hazard