Performance of industry loss estimates put under the microscope by JLT Re study
12 July 2018
- JLT Re has explored the precision of modelled market loss estimates by looking back at significant North Atlantic hurricanes since 20041
- Stronger model performance is observed when losses are anticipated and contained
- Accuracy suffers when events bring unforeseen (and often un-modelled) consequences
- Accuracy has improved over time but modelling firms can assist the market further with greater transparency around underlying assumptions
JLT Re, the global provider of reinsurance broking and consultancy, has today launched a new Viewpoint Report – Catastrophe models: In the eye of the storm. The paper examines the precision of modelled market loss estimates for significant hurricanes since 2004 and provides a unique perspective in assessing the modelling companies’ real-time loss estimation process.
Figure 1: Evolution of Modelled Loss Estimates for Select US Hurricanes – 2004 to 2017 (Source: JLT Re, AIR, RMS, Munich Re)
A high level overview of how the modelled industry loss estimates collected in JLT Re’s study evolved during the loss estimation period is shown by Figure 1. David Flandro, Global Head of Analytics, JLT Re, said, “This snapshot goes some way to explaining why the industry loss estimates provided by catastrophe modelling firms have led to general scepticism within the (re)insurance market over the last 15 years or so. At first glance, there is an overriding trend towards significant loss underestimation (the 2017 hurricanes apart), and it is not even immediately apparent that the range of loss estimates narrows during the lifespan of storms, or that they always become more accurate.”
However, breaking down industry loss estimates into groups of storms with similar characteristics reveals some interesting insights about model performance. JLT Re’s study shows that vendor models have historically performed relatively well for wind events that incurred moderate losses, regardless of landfall location. Or, in other words, conventional hurricane events that do not assume super-cat characteristics are typically captured adequately by vendor catastrophe models The models, however, have not performed as well for hurricane events where losses extend beyond wind into areas that are not modelled or well understood.
Josh Darr, Lead Meteorologist, JLT Re, said, “This highlights the inherent difficulties modelling companies face in predicting losses for complex hurricane events that strike highly populated urban areas. These types of events often bring unforeseen consequences that cause losses to spiral. Results for hurricanes Katrina, Ike and Sandy show that catastrophe models have struggled to generate accurate loss ranges in such circumstances. In each case, un-modelled loss components accounted for a significant proportion (if not the majority) of the total cost. Vendor firms have in recent years drawn on important lessons learned during these events to recalibrate their models and incorporate a whole host of previously un-modelled perils.”
Hurricanes Harvey, Irma and Maria (HIM) were therefore an important test for the latest generation of commercial hurricane models. Whilst the accuracy of the modelled losses
released for HIM in 2017 was mixed, certain results taken in isolation revealed some encouraging signs given the levels of complexities involved. The wealth of data collected during HIM, along with technological advancements, are likely to result in improved accuracy going forward.
Keith Leung, Head of Catastrophe Modelling – International, JLT Re, concludes, “2017 reinforced the importance of understanding differences between estimates. Working with a range of modelled, post-event views can be valuable as long as the important drivers are clearly highlighted, particularly in situations where significant divergences occur. Catastrophe modelling firms can assist the market further here by better communicating the key drivers of loss within each estimate and providing more transparency around the various assumptions being applied. It is likewise incumbent on market participants to review rigorously, or even challenge, some of the more extreme loss estimates released by modelling firms. We hope our report informs the debate and JLT Re looks forward to helping clients understand the important areas of uncertainty associated with future modelled industry loss estimates.”
1 Loss estimates provided by AIR and RMS have been used in the exercise.
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NOTES TO EDITORS:
JLT Re Viewpoint is JLT Re’s regular series of reports that comment on or give insight into key topics, occurrences or changes in the (re)insurance and broking marketplace. Read the latest Viewpoint Report here.
About JLT Re
JLT Re is the world’s fourth largest reinsurance broker, with approximately 800 professionals across 38 locations in 18 countries, delivering world class risk analysis and risk transfer solutions.
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We provide clients with broking and consultancy services across all classes of treaty and facultative reinsurance, including aviation, marine & energy, terrorism & political risk, trade credit, life accident and health, cyber, workers compensation and structured products.
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Jardine Lloyd Thompson is one of the world’s leading providers of insurance, reinsurance and employee benefits related advice, brokerage and associated services. JLT’s client proposition is built upon its deep specialist knowledge, client advocacy, tailored advice and service excellence.
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