About Catastrophe Modeling

This topic describes how catastrophe modeling is the process of using computer-assisted calculations to estimate the losses that might be sustained due to a catastrophic event such as a hurricane or earthquake.

Catastrophe modeling is especially applicable to analyzing risk and is at the confluence of actuarial science, engineering, meteorology, and seismology. The process involves the modeling of catastrophic events in specified geographic locations in order to analyze the exposure of insurers and reinsurers to these events. Insurers and reinsurers use catastrophe models to help calculate the potential amount of capital needed to discharge claims associated with catastrophic events.

Catastrophe models calculate the exposure of (re)insurers over a prolonged period and not just over the course of a single year. Catastrophe models help (re)insurers to identify, understand and manage the fluctuation in the number and severity of claims associated with large catastrophic loss events. An assessment of exposure to risk should not only consider the incidence of claim occurrences and the level of losses, but also be informed by a better understanding of all factors leading to claims including the location of insured risks and the characteristics of these risks also.

This understanding of risk exposure can inform and validate risk pricing, support the better risk management of exposures in terms of risk concentration and also provide new insight in support of reinsurance and risk transfer decisions.