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Encyclopedia > Catastrophe modeling

Catastrophe modeling (also known as cat modeling) is the process of using computer-assisted calculations to estimate the losses that could be sustained by a portfolio of properties due to a catastrophic event such as a hurricane or earthquake. Cat modeling is especially applicable to analyzing risks in the insurance industry and is at the confluence of actuarial science, engineering, meteorology, and seismology. This article is about the machine. ... Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. ... 2003 US mortality (life) table, Table 1, Page 1 Actuarial science applies mathematical and statistical methods to finance and insurance, particularly to the assessment of risk. ... Engineering is the applied science of acquiring and applying knowledge to design, analysis, and/or construction of works for practical purposes. ... // Meteorology (from Greek: μετέωρον, meteoron, high in the sky; and λόγος, logos, knowledge) is the interdisciplinary scientific study of the atmosphere that focuses on weather processes and forecasting. ... Seismology (from the Greek seismos = earthquake and logos = word) is the scientific study of earthquakes and the propagation of elastic waves through the Earth. ...

Contents

Perils analyzed

Natural catastrophes (sometimes referred to as "nat cat") include:

Other catastrophes include: This article is about weather phenomena. ... An earthquake is the result of a sudden release of stored energy in the Earths crust that creates seismic waves. ... A tornado in central Oklahoma. ... Flooding in Amphoe Sena, Ayutthaya Province, Thailand. ... A windstorm is a severe weather condition indicated by high winds. ... This does not cite any references or sources. ... A wildfire, also known as a wildland fire, forest fire, vegetation fire, grass fire, peat fire (gambut in Indonesia), bushfire (in Australasia), or hill fire, is an uncontrolled fire often occurring in wildland areas, but which can also consume houses or agricultural resources. ...

Terrorist redirects here. ... For other uses, see War (disambiguation). ...

Lines of business modeled

  • Business Personal property
  • Commercial property
  • Workers' compensation
  • Automobile physical damage
  • Leasehold Improvements
  • Limited Liabilities

Input

The input into a typical cat modeling software package is information on the properties being analyzed. This is referred to as the exposure data, since the properties are exposed to catastrophe risk. The exposure data can be categorized into three basic groups:

  • information on the site locations, referred to as geocoding data (street address, postal code, county/CRESTA zone, et cetera)
  • information on the physical characteristics of the structures (construction, occupancy, year built, number of stories, et cetera)
  • information on the financial terms of the insurance coverage (coverage value, limit, deductible, et cetera)

Output

The output is estimates of the losses that the model predicts would be associated with a particular event or set of events. When running a probabilistic model, the output is either a probabilistic loss distribution or a set of events that could be used to create a loss distribution; probable maximum losses (PMLs) and average annual losses (AALs) are calculated from the loss distribution. When running a deterministic model, losses caused by a specific event are calculated; for example, Hurricane Katrina or "a magnitude 8.0 earthquake in downtown San Francisco" could be analyzed against the portfolio of exposures. This article is about the Atlantic hurricane of 2005. ...


Uses

Insurers and risk managers use cat modeling to assess the risk in a portfolio of exposures. This might help guide an insurer's underwriting strategy or help them decide how much reinsurance to purchase. Some state departments of insurance allow insurers to use cat modeling in their rate filings to help determine how much premium their policyholders are charged in catastrophe prone areas. Insurance rating agencies such as A.M. Best and Standard & Poor's use cat modeling to assess the financial strength of insurers that take on catastrophe risk. Reinsurers and reinsurance brokers use cat modeling in the pricing and structuring of reinsurance treaties. Likewise, cat bond investors, investment banks, and bond rating agencies use cat modeling in the pricing and structuring of catastrophe bonds. Reinsurance is a means by which an insurance company can protect itself against the risk of losses with other insurance companies. ... A.M. Best Company, Inc. ... Publications Standard & Poors publishes a weekly (48 times a year) stock market analysis newsletter called The Outlook, which is issued both in print and online to subscribers. ... Catastrophe bonds (also known as cat bonds) are risk-linked securities that transfer a specified set of risks from the sponsor to the investors. ...


Demand surge

Some cat models allow the user the option of including demand surge in the loss estimates, which is post-event inflation. After a large disaster, construction material and labor can temporarily be in short supply, so construction costs are inflated. The larger the impact of the event on the local economy, the larger the effect of demand surge. For example, an event that causes a $5 billion insurance industry loss might cause demand surge to increase construction costs by 5%, while an event that causes a $40 billion insurance industry loss might cause demand surge to increase construction costs by 25%.


See also

HAZUS HAZUS(abbreviation for HAZards United States) Several years ago FEMA began to design a loss estimation software package that is linked to GIS technology. ...

External links


  Results from FactBites:
 
Catastrophe modeling - Wikipedia, the free encyclopedia (644 words)
Catastrophe modeling (also known as cat modeling) is the process of using computer-assisted calculations to estimate the losses that could be sustained by a portfolio of properties due to a catastrophic event such as a hurricane or earthquake.
Cat modeling is especially applicable to analyzing risks in the insurance industry and is at the confluence of actuarial science, engineering, meteorology, and seismology.
Some cat models allow the user the option of including demand surge in the loss estimates, which is post-event inflation.
Converium: A Brief History of Catastrophe Risk Modeling (1413 words)
Modeling firms like AIR expanded their staff by a factor of five within one year and started to develop models for areas outside the US.
The task of a cat model is not necessarily to produce a 100% accurate result (although this would make things much easier), but to demonstrate the potential impact of catastrophic events on a particular insurance contract or (re)insurer's portfolio.
Man-made catastrophes such as the terrorist attacks on the WTC on September 11, 2001, cannot be properly described using a model.
  More results at FactBites »

 
 

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