Robust interaction among commercial catastrophe model vendors, re/insurers, intermediaries, and academic and government researchers is the best way to ensure our industry has the tools to deal with a changing risk environment.
Benefits of greater transparency
It wasn’t so long ago that industry participants shied away from “opening up the black box.” But many factors—including regulatory and rating agency expectations that insurance companies form their own view of risk—have been driving the industry toward greater transparency. We’re seeing increased interest in open platforms such as AIR Touchstone and RMS(one), as well as environments like the Oasis loss-modeling framework that could further increase dialogue between practitioners and researchers.
An open discussion of the basic science benefits all participants, without harming commercial business interests or constraining trade. Research scientists can hear from those seeking to apply their results to problems of business and government. And those of us in the insurance industry gain a deeper understanding of our current tools, as well as insights to improve storm and flood models in a changing climate environment.
Sharing tropical cyclone models
As part of its initiative on Extreme Weather and Climate, Columbia University (a member of the Willis Research Network) recently hosted a small and informal tropical cyclone risk modeling workshop. The event gathered together a number of leading U.S.-based scientists along with researchers from commercial model vendors, insurers, reinsurers, and reinsurance brokers – and also included representation from the New York City Office of Emergency Management.
The event focused on discussing recent developments in modeling tropical cyclones (a.k.a. hurricanes or “TC”). A key theme was to establish what the universe of tropical cyclone models contains.
Currently models are being developed by an array of organizations, which have not always worked together closely. These include:
- Commercial vendors such as AIR Worldwide (AIR) and Risk Management Solutions (RMS)
- Government research entities such as the NASA Goddard Institute for Space Sciences as well as our WRN partners from the National Center for Atmospheric Research and the NOAA Geophysical Fluid Dynamics Laboratory
- Academic research institutions including Columbia, Princeton, and MIT
- Re/insurers also have their own proprietary models or adjustments they apply to the commercial models, for example as Willis Re sets out in our Willis Re View of Catastrophe Risk
This unique gathering presented an opportunity to understand the academic perspective on some of the assumptions made by vendors in developing their hurricane event rates for the North Atlantic basin – such as seasonal prediction of tropical cyclones, the medium term rates from RMS and the warm sea surface temperature catalogue from AIR.
Academia vs. business applications
Academic research emphasizes careful study, open discourse and peer review; it can take years for new theories and approaches to gain influence. Businesspeople, on the other hand, must make decisions and take action under time pressure, even in the face of limited or imperfect data – and they are cautious about revealing too much about proprietary intellectual property.
These differing perspectives manifest in many ways. Several times over the course of the day we noted that insurance industry practitioners view TC modeling as relatively robust and mature (after all, we’ve been using it for more than 20 years!) whereas research scientists tended to focus on the limitations of our understanding.
The panel also discussed climate change and the potential impact on the re/insurance industry. Especially in light of observed sea-level rise and the associated increased potential for storm surge and flooding, climate change is already affecting the re/insurance sector.
Additional events like this, whether sponsored by leading universities like Columbia or industry organizations like the Willis Research Network, offer great promise. I look forward to the next conversation!