‘Open models’ and real-time cat data valuable to traders

Real-time catastrophe data can provide claims adjusters in insurance companies with better information and allow them to make risk decisions in real time, whether that be buying live cat over, buying more reinsurance or in the ILS market, Karen Clark, CEO and founder of Karen Clark & Company (KCC), told Monte Carlo Today.

“The more accurate our industry numbers are, the more confident clients can feel trading in real time,” Clark said.

When there is a hurricane in the Atlantic or the Pacific threatening to make landfall, real-time hurricane tracking can offer claims estimates to clients at the storm develops. For example, Hurricane Irma in 2017 was originally forecast to hit Miami as a category 4 to 5 storm and go along the US east coast, with industry loss estimates around $180 billion. It changed course, and the losses were ultimately a lot less.

Clark stresses that, while the course of events change, the models must still do better. “If your model is not accurate for real events in real time, why should insurers expect that the exceedance probability curves are accurate? It’s really important for the model to produce accurate loss estimates,” she said.

One of the main problems Clark sees in the industry is that models are not transparent enough. “They are used for PML estimations and capital requirements, and ratings agency look at them,” she said. “All models must be open, that is the vision of the future.”

Clark explained that each risk modelling company has its own definition of an ‘open model’, and more modelling companies will claim their model is open. Generally speaking, open models refer to the open-source cat modelling platforms, such as Oasis.

The KCC definition of open means that all the components of the model can be visualised and seen by clients, meaning all the intensity footprints, damage functions, secondary uncertainty distributions and other important components are open to view.

Clark suggested that open models can be used by clients to compare claims estimates with the eventual claims experience—allowing them to assess the accuracy of different models and learn from the process.

For traders, Clark suggested that real-time catastrophe tracking—for severe convective storms, hurricanes or earthquakes—will provide better information for live cat transactions and insurance loss warranty (ILW) trading.

“At any point in time, people will want to buy and sell industry loss triggers—they are typically $10, $15 or $20 billion,” she said.

“If I have in my portfolio an ILW that’s going to trigger at $15 billion, I may make a trading decision if I think this loss amount is going to be under or over.”