Consulting Services
Every year the financial exposure to catastrophic loss increases. As assets and property values grow, the potential for capital-impairing events and losses also grows. According to current estimates, the expected annual loss from catastrophes in the U.S. is well over $20 billion for property damage only. Economic losses from the largest loss events will easily exceed $250 billion—more than twice that of Hurricane Katrina. These numbers will continue to rise as more, larger, and higher valued properties are built in areas exposed to catastrophic events.
While most companies use catastrophe models to assess their catastrophe risk, the events of the past several years have shown clearly that catastrophe models are not perfect predictors of a company's catastrophe loss potential. It has also become clear the models alone do not ensure companies will maintain financial health after major events. Because catastrophe models are just one tool and catastrophe modeling is just one step in the risk management process, senior executives and boards of directors are taking more active roles in understanding catastrophe risk and ensuring their companies have effective, holistic risk management processes in place.
Karen Clark & Company consultants have unique expertise in the areas of catastrophe risk, exposure data analysis, catastrophe modeling and catastrophe risk management.
For the first time, there are independent experts on catastrophe models and catastrophe risk assessment who can answer questions such as:
- Why do the results from different models differ so significantly?
- Why do the models and model results change?
- How can I test the reliability of the model input and output?
- What are the pitfalls to avoid in using the models for certain purposes such as portfolio optimization?
Here are just a few areas where we can help companies to better assess, understand, and manage their catastrophe risk:
Catastrophe Model Evaluation
Whether you're using a homegrown model or one of the major vendor models, you need to make sure the model is able to capture the risk to your portfolio. Where are your geographical concentrations and what types of events can occur there in the future? Are all of your potential large loss scenarios being captured by the model(s) you are using? If you are using multiple models, how do you interpret the differences? We can assist your internal professional staff to review your catastrophe model and how it is estimating the potential losses on your portfolio. We can also help you understand model differences if you have a multi-model approach.
Exposure Data Review
Catastrophe risk assessment requires accurate and detailed exposure data in order to produce reliable model results. Having good address information that can be accurately geo-coded is only one of the model requirements. Companies also need to know what is being insured at each address and how much value is there in terms of building, contents, other structures and potential additional living expenses or loss of business income. We can review your data for completeness and accuracy as well as provide recommendations for data enhancement. We can work with your internal professional staff to improve the quality of your catastrophe model exposure data input and therefore model results.
Catastrophe Model Output Analysis
Catastrophe models produce reams of very detailed output that can be used for many different purposes. How reliable is the model output and how can it be validated? Frequently, it is not clear how to interpret the numbers and in particular, the uncertainty around the numbers. How robust are the different measures of risk, such as return period losses, average annual losses at the territory, postal code or location level? How far off can the numbers be and what does this mean for ratemaking, individual account underwriting, and portfolio optimization? As model results are generated at higher and higher resolution, the uncertainty and potential for significant changes increase. We can help your internal professional staff to develop techniques to mitigate the effects of this uncertainty for more consistent and reliable business decisions over time.
Risk Transfer Strategy Analysis
Companies have many options today when it comes to transferring catastrophe risk. You can buy reinsurance, issue catastrophe bonds, use ILWs and other risk transfer mechanisms to manage catastrophe risk. Most sophisticated risk transfer programs use a variety of such mechanisms. We can work with your internal professional staff to evaluate the benefits and limitations of each and to develop an integrated risk management program.