Katrina indicates shortfalls of cat models

Shortfalls in the use of catastrophe models have been exposed as a result of their attempts to rate the losses of Hurricane Katrina, according to A.M. Best Co.
These shortfalls have brought the use of some catastrophe models into question.
“Everyone’s a little bit disappointed with the fact that the modeled losses were significantly smaller than the actual losses,” Matthias Weber, a board member of Swiss Reinsurance Co., Americas division, said at the Property Casualty Insurers Association of America’s annual conference in Chicago, “and as a result of this, there are people saying the models aren’t reliable and we shouldn’t use them.”
Executive vice president of cat modeler Risk Management Solutions Inc. Paul VanderMarck said a RMS report on Katrina found that insurers’ exposure data was “outdated, incomplete, poorly resolved and miscoded.” This, he continued, led to the underestimation of risk and therefore “significant improvement” in cat modeling is needed.
Commercial insurers also are looking at the use of cat models. Thomas F. Motamed, vice chairman and chief operating officer of Chubb Corp., which sustained a loss of US$511 million as a result of Katrina, said the magnitude of the losses experienced by both the industry and Chubb “significantly exceeded” what was suggested under existing catastrophe models.