The Lloyd’s Market Association (LMA) has published a new guide on catastrophe modelling in response to the increasing use and complexity of today’s cat models. The new guide focuses on uncertainty in catastrophe modelling and is aimed at anyone who relies upon cat models but does not have a detailed understanding of the uncertainty contained within them.

‘Understanding Uncertainty in Catastrophe Modelling for Non-Catastrophe Modellers’ follows guidance published by the LMA’s Exposure Management Working Group in 2013.

The guide explains the five main reasons for uncertainty within cat models; these are:

• non-modelled losses: which can result from regions or perils not included in the modelling assessment, risks that are not considered by a model, or missing exposures

• exposure data: the accuracy of the cat model is reliant on the quality of its input data

• event frequency: historical data on catastrophe is limited and is not always a reliable guide to what events may occur in the future

• risk vulnerability: catastrophe risks may have several different characteristics, such as wind damage and flood, insured risks may have different vulnerabilities to these hazards

• financial calculations: translating risk and frequency into possible claims value and volume.

Director of finance and risk at the LMA, Ken Curtis, said as 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,” he explained. “This guide provides an invaluable tool to LMA members and the insurance market generally in understanding this uncertainty.”

The LMA guide ‘Understanding Uncertainty in Catastrophe Modelling for Non-Catastrophe Modellers’ is available from the LMA website www.lmalloyds.com/cmg

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