Catastrophe Modelling
October 1, 2009
A catastrophe can be a disaster and misfortune which occurs due to natural phenomena like an earthquake, hurricane, flood, tornado, wildfire, storm or hail. The other types of catastrophes can be man-made like war, terrorism, and so on. The process of calculating and estimating losses, caused due to catastrophe, with the aid of a computer, sustained by a set of properties, is called Catastrophe Modelling. Also known as Cat Modelling, this process is mainly used to analyse risks in the insurance sector. Catastrophe Modelling also relies on sciences like seismology, meteorology, engineering and other related actuarial science.
As in any computer process you need a set of inputs for the Catastrophe Modelling software. As you are going to estimate the loss on properties, you need to input the property details, and this is known as exposure data, as it is exposed to risk in a catastrophe. This data will first specify the location of the property, and is referred to as geocoding. Then comes the structural characteristics of the property, like type of construction, number of floors, the year the structure was built and so on. The input also includes the type of insurance coverage like the policy amount, the limit on the claim, deductibles and so on.
The Catastrophe Modelling software then analyses the data and predicts the possible extent of losses for a particular catastrophic event or multiple events. The output will be a probable figure and as such maximum losses and the distribution of loss can be gauged from these figures. A given magnitude of the catastrophe can also be used to get a more accurate output. The magnitude could be the strength of a previous hurricane like Katrina or a particular value of the Richter scale.
Catastrophe Modelling is used in risk management, and by insurers to calculate the estimated value of loss in a particular coverage. This will help the insurer in arriving at the premium he should charge and also whether he needs to purchase any reinsurance. Cat Modelling is also used by Insurance rating agencies in determining the financial capacity of an insurance company, when providing coverage on catastrophe risks.
Certain Catastrophe Modelling softwares also enable the user to input the likely inflated values which are possible after a catastrophic event. After a disaster on a large scale, value of commodities and material generally go up as their supply is limited. In such a scenario the cost of reconstructing the damaged properties will be much higher. It is the impact on the economy which is caused by the catastrophe, and there is a surge in demand for construction materials
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