Lighthill director Peter Taylor has warned that risks today are underpriced and cat modellers need to address 10 key issues

A lot of today’s risks are significantly under-priced, according to Peter Taylor, project director at the Lighthill Risk Network.

Taylor, speaking at the IUA/RAA Catastrophe Modelling Conference in London, said that cat modellers need to move forward from “The Age of the EP [exceedence probability] Curve” to “The Age of Recognised Uncertainty”.

In this new age, according to Taylor, it is parameter and model risk, rather than process risk that will play the central role.

“We think we understand the world but the world keeps fighting back,” said Taylor. “Our challenge is to represent the full range of uncertainty and when we can quantify that, then we are charging a fair price for the risks we are bearing.”

Taylor outlined 10 key issues facing cat modellers today, which included:

Sensitivity tests – how sensitive the model outputs are to the data inputs anfd model assumptions;

“Our challenge is to represent the full range of uncertainty and when we can quantify that, then we are charging a fair price for the risks we are bearing.

Peter Taylor, project director at the Lighthill Risk Network

Parameter and model risk – the need to use two or 3 models to aggregate results into a “rough guide”;

Event non-independence – models today assume independence but event dependence needs to be built in as researchers ask “Do earthquakes trigger other earthquakes?”;

Unpredictable/un-modellable risks – for example terrorism is very difficult to model and weather predictions will never go beyond 14 days; and

Emerging risks – the world is changing so fast now that no one can keep up with it. Who is thinking about these problems?

“The industry has the skills available to them but at the moment there is an attitude problem,” warned Taylor. “There is no immediate motivation for people to move out of their comfort zone. I am a big supporter of open source risk assessment. It would let us ‘plug and play’ with academia, hedge funds and the modelling community. Perhaps then we will see the behavioural demand changes needed.”