The Lloyd’s Market Association (LMA) has launched a new catastrophe modelling guide designed to educate the industry on the complexities and uncertainties these models involve.
The guide, Understanding Uncertainty in Catastrophe Modelling for Non-Catastrophe Modellers, is aimed at anyone who relies on cat models but does not have an understanding of the uncertainty they involve.
In the guide, LMA discusses five main reasons for uncertainty within a cat model.
These include non-modelled losses, which, according to the guide, can result from regions or perils not included in the modelling assessment, risks that are not considered by a model, or missing exposures.
Another uncertainty is exposure data; the accuracy of the catastrophe model is reliant on the quality of its input data.
Event frequency is also included in the guide. It explains that, because historical data on catastrophe is limited, it is not always a reliable guide events that could happen in the future.
The guide also suggests that catastrophe risks might have several different characteristics, such as wind damage and flood, and insured risks, and might have different vulnerabilities to these hazards.
Finally, the guide covers the financial calculations around translating risk and frequency into possible claims value and volume.
Ken Curtis, director of finance and risk at the LMA, said: “As our reliance on, and the sophistication of, catastrophe models grows, so does the level of uncertainty inherent in the models.”
“Few outside the cat modelling industry are fully equipped to recognise this, and the consequences it has on assessing and pricing risk. This guide provides an invaluable tool to LMA members and the insurance market generally in understanding this uncertainty.”
