Catastrophe (cat) modelling has grown to become one of the largest budget items within the insurance and reinsurance industry. Not only are cat models traditionally costly to license, but there are also significant resource requirements associated with hosting and operating cat models. This, combined with the fact that the industry has until recently lacked a simple option for evaluating models prior to purchase, has made it prohibitively difficult for re/insurers to build a case internally for changing or adding models. But, as the frequency and severity of natural catastrophe changes, it is more important than ever that firms have a deep understanding of their cat risk.
Any business case to change or add models must present tangible benefits, and adopting new models requires a high level of confidence in the models prior to adoption. Part of the process of building confidence in a new model will come from understanding the model assumptions and performing model validations. Being able to easily test cat models prior to adoption is a critical step in building this confidence.
Model evaluations or “trial periods” have the potential of improving benefit quantification since they provide firms with hands-on experience of how a new platform or model works, and the benefits they can deliver.While there are many obvious benefits to model evaluations, the costly infrastructure and resource requirements associated with modelling has meant that model evaluations have traditionally been prohibitively difficult to set up. Making a business case for changing or adding catastrophe models has therefore been a significant challenge for insurance firms, as they have little knowledge of how a new model works outside of reading the documentation. New platforms and hosted technology solutions are helping to remove this barrier and are making it easier for firms to trial cat risk models prior to purchase, without any infrastructure requirements. These platforms have the potential of improving benefit quantification since they provide firms with hands-on experience of how a new platform or model works, and the benefits they can deliver. .
Trialling models in practice
With Nasdaq Risk Modelling for Catastrophes, re/insurance firms can access and trial a range of models free of charge without having to install any hardware or software.Nasdaq Risk Modelling for Catastrophes offers model evaluations from a range of vendors, free of charge and without any infrastructure requirements. As a fully-hosted service, clients can access the models they wish to trial via a single web-based user interface. By allowing firms to access multiple models from different vendors and compare the outputs, the service helps firms make more informed decisions about their risk. By doing so, re/insurers get the tools they need to make a sound business case for new model adoption, based on more accurate cost-benefit analysis. By enabling firms to trial models prior to purchase, re/insurers will gain confidence in alternative model vendors, promoting usage of smaller vendor models and encouraging new model development globally.
The evaluation process is straightforward. After a model evaluation agreement has been completed, the evaluating firm is given access to the service via a secure web browser for global access. The firm can then login and evaluate and compare model(s) at its own convenience for a set period of time.The ModEx evaluation process follows three simple steps: 1. Complete the model evaluation agreement 2. Receive ModEx training 3. Log in to the web-app and run the model(s) selected for evaluation Once the evaluation is completed, firms can decide whether or not to license one or multiple models on ModEx. The licensing process is quick and easy, managed under a single contract which covers both the ModEx hosting and the individual cat risk model licenses. Evaluations are offered for free (with agreement from the model provider), ensuring the process can be undertaken at minimal cost.
Model evaluations provide firms with the tools they need to make a sound business case for new model adoption, based on more accurate cost-benefit analysis.Without hands-on experience of how a new model works, firms will struggle to justify adding or changing cat models. The benefits of model evaluations to the (re)insurance market are clear: Quick and efficient access to models via a web-based interface reduces pressure on internal IT resources to provide systems for model evaluation Standardized financial module provided by Oasis LMF enables (re)insurers to consistently compare loss calculations from different Oasis-based models side-by-side Comparing model results to other models in the market can help firms ensure they are using the best model for their needs, at the best price point Better cost-benefit analysis to aid the business case for changing or adding catastrophe models, ultimately improves a firms’ view of risk, enhancing portfolio management and ongoing financial planning