From Katrina to Sandy, Catastrophe Models Adapt to New Conditions

In the insurance industry, catastrophe modelers are kept busy following large disasters as they build new information into the models. Insights gained from hurricanes, earthquakes, and other catastrophes underpin an important truth: Models need constant updating based on experience. Even an up-to-date model can miscalculate the potential damage from a storm that behaves in an unforeseen manner — potentially by a significant margin.

Underwriters learned this the hard way when Hurricane Katrina struck in August 2005. The massive storm cost insurers more than $41 billion, mostly in New Orleans. Hurricane models severely underestimated the loss potential, with initial damage estimates identifying only about one-fourth of that total. In the case of 2012's Superstorm Sandy, storm surge in the New York/New Jersey area caused more damage than expected.

Post-event analysis from actuaries and modelers often reveals that many assumptions had been incorrect. For example, models may have underestimated the potential damage that could be caused by coastal flooding driven by wind or storm surge. Models may also often incorrectly assume that all properties were built to meet existing codes.

In, “A Decade of Advances in Catastrophe Modeling and Risk Financing,” we analyze the lessons learned from a number of events over the past decade and how the models contribute to new methods of risk finance.

We discuss:

• How catastrophe modeling evolves.
• Modeling’s critical role in the underwriting process.
• Why quality data is critical to cost-effective risk management strategies.
• How risk financing optimization enables smarter decision making.