2017 was an eye-opening year for many when it comes to the dangers of underestimating natural disasters. Hurricane Harvey alone racked up nearly $125 billion in damages. When you consider the entire hurricane season, wildfires and more the total dollar amount for damages quickly becomes astronomical. In fact, that number is so astronomical that it has the entire insurance industry rethinking the best way to approach catastrophe (CAT) modeling in the future.
Steven Kelner, managing director and head of U.S./Canada Analytics at Guy Carpenter & Company LLC spoke with the Insurance Journal about this predicament. “You can run the models all day,” said Kelner “But when you go down to Houston and look at neighborhoods, there were huge neighborhoods where the whole neighborhood was deemed not flood exposed. And the whole neighborhood but a house or two was flooded, because the maps weren’t accurate; because the data wasn’t up-to-date.”.
Yes, modeling software is an invaluable tool for insurers when it comes to analyzing the risk of a particular area. However, as last year proved, relying entirely on modeling software is a foolish approach. Insurers must use modeling software in conjunction with historical data and local research in order to gain a comprehensive, and realistic, understanding of the area they are trying to insure.
Bruce Jones, executive vice president and chief risk officer at The Travelers Companies Inc. also spoke with the Insurance Journal about this topic. According to Jones “Part of what I think makes a good insurance company work is that you do get different points of view about a risk. And it’s not just the risk, but it’s also the reward. Because we could get concerned about every risk that an insurance company faces and wind up writing no business. Part of the collaboration is balancing the risk side of the equation with the reward side of the equation.”.
While the specifics of how the insurance industry is going to adapt to this new word of catastrophe modeling are still unknown, the impetus behind the change is not. Natural catastrophes are becoming more prevalent, and the insurance industry needs to keep up in order to deliver on the services that they promise. Just how they will do that remains to be seen.