The Question of Catastrophe Models

Insurers’ use of catastrophe models has come under increased scrutiny since the record hurricane loss seasons of 2004 and 2005. Today’s article in the Wall Street Journal by reporter MP McQueen takes aim at insurers’ use of newer hurricane models that incorporate near-term projections of loss. A point worth noting is that insurers cannot arbitrarily raise rates based on catastrophe model outputs. By law, the rates charged by insurers may not be excessive, inadequate or unfairly discriminatory. The use of computer technology in the underwriting process is not new and catastrophe models are just one of the many tools that help insurers, reinsurers and risk managers more accurately analyze, write and price for catastrophe risk. Check out today’s posting by Felix Salmon of finance blog Market Movers at Portolio.com for a different viewpoint. Check out further I.I.I.  research on catastrophe modeling.

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