JB Crozet looks at the value for reinsurers of including catastrophe models in their business plans
Catastrophe Modelling involves the use of computer-assisted calculations to model losses that could be sustained by an insurer or reinsurer due to a catastrophic event. The models help guide an insurer’s underwriting strategy and can help in their reinsurance buying strategy decisions.
However the critical question is not whether catastrophe models create value or not: they most certainly can, by continuously striving to provide “state of the art” quantification of catastrophe exposures. But this does not happen in a vacuum – it is important not to forget that catastrophe models belong to the sphere of technology and not strategy.
The value captured from technology depends almost exclusively on how well it is embedded and leveraged to make money for the organisation. For instance, the same GPS technology adds more value to the courier looking to optimise its delivery rounds than to the commuter using it as a grown-up toy.
In my opinion, a much more pertinent riddle for a reinsurer is: “How do I best capture the value from my catastrophe models?” Although the overall trend is clearly towards “more catastrophe modelling” and “better controls”, we currently see a truly striking diversity in strategies in the market.
While some organisations are purely focused on complying with the regulators and rating agencies, others have a business model revolving around their superior catastrophe modelling environment. The latter have managed to benefit from their competitive advantage in many ways, including:
“The same GPS technology adds more value to the courier looking to optimise its delivery rounds than to the commuter using it as a grown-up toy
JB Crozet Associate director, PricewaterhouseCoopers
• enhancing the sophistication of their portfolio management approaches, to achieve greater diversification of their exposures;
• monitoring their aggregations in near real time, in order to facilitate rapid changes in strategy or capital allocation;
• pricing contracts according to their marginal contributions;
• using securitisation to access wider sources of capital; and
• leveraging their credibility with regulators and rating agencies, in order to reduce their cost of capital.