By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®
My father dislikes computers. Perhaps scorns them is the better way to put it. Whenever he hears a story about servers crashing and terabytes of data disappearing or, worse, thieves slipping through feeble IT security barricades and stealing 1 million identities, he curses the day computers were invented. "We never had to worry about that crap before," he proclaims.
It's a stretch, but I'd say that folks who bash catastrophe models show a similar nostalgic underappreciation that my father shows for everything computer-related. CAT model attackers fail to grasp how ingrained the software tools are in everything property insurance related.
In the world of property reinsurance and insurance underwriting, the lingua franca is modelese. If an insurer wants to impress a reinsurer with its book of business and get the best treaty rates, then that property data better be modeled, using multiple modeling brands along with extra analysis from your favorite reinsurance intermediary.
Savvy risk managers not only tap into their broker's modeling expertise. They find out who's modeling at their wholesale brokers and pick their ear. They even develop an internal staff capable of managing their property data, especially making sure that their data is available, accurate, detailed and model-ready for their underwriters.
I am not saying that CAT models are important simply because they are used everywhere. Models are used everywhere because they are important.
Important does not mean flawless of course. Yet the very smart people who run the modeling firms will be the first people to warn you of the technical and scientific limitations of their product.
Also warning you will be a whole host of modeling detractors that can be heard at industry seminars and in the trade press, including this publication. Listen to these modeling critics, though, and you'll still hear just how significant, and indispensable, models are.
Lately, structural engineering and loss control firms have made a mad push to convince corporate risk managers that models aren't good enough to truly comprehend, and mitigate, their property exposures, especially down at the individual property level. But their argument always is, corporate risk managers need our service on top of the models.
Some risk consultants will argue that the industry relies too much on models, that models are just one tool among many. But even here, their central message is really about a failure of underwriters and risk managers to use models properly, not to question the use of models.
Other consultants out there will even suggest that we've reached the limits of modeling's benefits. The science is as advanced as we're going to get it, they say. So it's time for us to start developing news tools. They say this, yet again they never say we should stop using models. Just the opposite.
That's because modeling is now as much a part of property insurance deal-making as are dinners at delicious, corporate-priced restaurants, meetings in exotic locales at expensive hotels, and the web of personal relationships between risk managers, brokers and underwriters.
Why? It's because their products are useful and innovative and do something that nothing else can. CAT models allow underwriters to access the latest geological, atmospheric, meteorological, political ... you-name-it scientific consensus out there to estimate insured losses from a given peril on a set of properties over a certain period of time.
Catastrophe modeling isn't going anywhere. So I imagine its detractors will have to continue on like my father, who after his occasional anti-computer tirade at a family dinner, wanders upstairs to his desktop and goes online to check his investments and look at photos of my niece and nephews.
(To read Managing Editor Cyril Tuohy's counterpoint to this argument, click here.)
October 15, 2009
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