Risk modelling uncertainty rampant: S&P

Ratings agency Standard & Poor’s (S&P) has discussed the uncertainty with catastrophe risk modelling and the impact this can have on insurance and reinsurance ratings, underlining the need for companies to take any uncertainties into account. “Catastrophe modeling is a complex process that is influenced by numerous estimates, assumptions, and subjective judgments.

“We consider that there is a significant modeling uncertainty when estimating cat exposure–that is, the difference between the potential range of losses under extreme events (consistent with a 1-in-250-year loss) and the losses estimated using the catastrophe models at this confidence level,” states S&P.

Many reinsurers have different levels of exposures to modelling uncertainty, as some will have greater exposure to perils that have less sophisticated modelling capabilities, some will utilise in-house modelling techniques, while others will rely solely on third-party vendor models, the report said.

It’s also important to remember that for some peril regions catastrophe modelling isn’t particularly advanced, so greater uncertainty is to be expected in some cases, although technology and a willingness from the industry to expand its reach is starting to lead to advances in some areas.

“As a consequence, the cat exposure estimates of different reinsurers carry different relative levels of modeling uncertainty,” explains S&P.