Are models capturing large events like Hurricane Katrina?
Catastrophe models need to provide insurers and reinsurers with reliable information about the potential for large losses before they occur. Therefore, companies should be sure that the catastrophe models they use incorporate potential events that represent the likelihood of losses similar to and even exceeding those caused by Katrina. To put it in the starkest of terms, if the catastrophe model you relied on for the 2005 renewals did not contain Katrina-like events, you did not have a realistic view of the portfolio’s risk, leaving you unable to make fully informed decisions on how best to manage that risk. The industry insured loss from Hurricane Katrina has an approximately 3 percent annual probability of occurrence, according to the AIR Worldwide U.S. hurricane model. Even the probability of a $100 billion industry loss is within the range to which most companies manage their risk. In fact, the AIR model contains hundreds of hurricane loss scenarios larger than Hurricane Katrina, s
