IN 1992 Hurricane Andrew struck the United States. AIR, the pioneer in catastrophe modeling, projected an estimate loss exceeding $13 billion. The announcement was met with skepticism. A few months later, the Property Claims Service (PCS) reported an industry loss of $15.5 billion. Eleven insurers became insolvent. Interest in catastrophe modeling grew “almost overnight”.
During the 2011 monsoon season in Thailand, the flooding caught the insurance industry by surprise. Sixty-five of Thailand’s 76 provinces were declared flood disaster zones. The World Bank estimated 1,425 trillion baht ($46.5 billion) in economic damages and losses due to flooding, as of December 1, 2011. Incidentally, 2011 was regarded as a record year for natural catastrophe, with insured losses costing the insurance industry more than $127 billion. The insurance losses may, in some way, be attributed to insufficient risk assessment on the occurrence of flooding. More important, there was no catastrophe modeling for floods.
Catastrophe risk modeling or simply catastrophe modeling (cat modeling) is a fairly recent development in the world of property insurance (the first in the late-1980s). It is a system to estimate the likelihood and severity of catastrophes, as well as the loses, and analyze risks due to a catastrophic event, such as earthquake, flooding and hurricanes. It calculates the probabilities of a disaster and more important the expected losses. Cat modeling is generally computer assisted using the latest in information technology.
The study is a confluence of other disciplines as well, such as actuarial science, engineering, meteorology and seismology. It has been proven to be remarkably accurate in its risk assessment. In underwriting natural disaster risks, cat modeling has become imperative. Thus, cat modeling for hurricanes or earthquakes has become vital for insurers and reinsurers.
Catastrophe modeling may either be closed or open. It is closed when data formats are proprietary. It is open when it is available and accessible to all. An example of an open framework is the Oasis Loss Modeling Framework (OLMF). Oasis is a not for profit organization funded and owned by about 40 of the world’s leading insurers, reinsurers, brokers and financial institutions. Another open format is the Alliance for Global Open Risk Analysis.
There are several cat model providers around the world. Among them: AIR Worldwide (AIR) founded in 1987, Risk Management Solutions founded in 1989 and EQECAT founded in 1994. AIR Worldwide was the pioneer in cat modeling. It is an American risk modeling and data analytics company headquartered in Boston, Massachusetts. It was founded as Applied Insurance Research in 1987. It was acquired by Insurance Service Office in 2002 and renamed AIR Worldwide Corp.
Beginnings of cat modeling
In the 1800s fire risks were determined by identifying the concentrations of fire occurrences using pins placed on maps. For earthquakes, the magnitude was measured and recorded. For hurricanes, the intensity. This coincided with the invention of the seismograph, as well as the anemometer which measures wind speed. But this process was cumbersome and time-consuming. It has become complex and detailed. With the development of computer and information technologies and the development of natural hazard measurements, cat modeling as we now know it was born.
Oasis Loss Modeling Framework
The OLMF was founded in 2012 and is hosted by Equinix, it was developed over a period of five years at a cost of $4 million. It is in an open source format—which encourages users and stakeholders to share data and information. In other words, it encourages collaboration as users are connected to one another. The interconnectivity allows multiple sources to evaluate risks in real time. Oasis is owned by leading insurance industry players with about 100 associate members. It is used by leading reinsurance brokers such as Guy Carpenter. It is free for use by everyone.
The OLMF was introduced in the Philippines for the development of a flood model under a two-year project funded by the International Climate Initiative of the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety. The project has several partners which include, among others, the National Reinsurance Corp. of the Philippines, the Disaster Risk and Exposure Assessment for Mitigation Program of the Philippines (UP DREAM), and the Philippine Atmospheric Geophysical and Astronomical Services Administration.
****
Dennis B. Funa is the current insurance commissioner. Funa was appointed by President Duterte as the new insurance commissioner in December 2016. E-mail: dennisfuna@yahoo.com.