Taking the garbage out of your catastrophe model

By Sanford Brown  |  October 22, 2014

To minimize uncertainty, an effective risk management program has to begin with complete and accurate data. “Garbage in, garbage out” is a cliché, but overuse hasn’t diminished its relevance. You can have the best catastrophe model in the industry, but if the data is incomplete or wrong, your model will produce inaccurate results. That leads to poor underwriting and pricing information.

Here’s a pretty straightforward example of how incomplete data can dramatically affect your model. An insurer had only basic information for a commercial property — a motel — in Fort Lauderdale, Florida: the street address, and that it was a hospitality occupancy. Maybe you’d want to underwrite this risk, but there’s a lot of information missing that you shouldn’t take for granted. As you know, when exposure data lacks key elements, catastrophe models default to geographic weighted averages. In this case, the hurricane model analysis pro­duced an average annual loss (AAL) estimate of $100,000. Was that truly accurate for this property?

Using exposure information from our Cat Data Append service, Verisk Commercial Property provided data about the motel’s construction class, which was masonry. That positive development adjusted the AAL down from $100,000 to $30,000. Next, we verified that the motel was built in the year 1990 under a less desirable building code. As a result, the AAL rose to $55,000. Finally, noting that the building was just two stories high lowered the AAL estimate to $45,000 — a number significantly different from the initial loss estimate of $100,000.

Our verified and accurate Cat Data Append information reduced uncertainties and provided a more precise loss estimate model. The additional details helped improve the insurer’s underwriting and pricing and made the insurer more competitive for this coverage.

Cat Data Append can also benefit you in working with reinsurance and rating agencies. Find out more about all the benefits of data accuracy for catastrophe models. To get started, call Verisk Customer Support at 1-800-444-4554, option 3.

Sanford Brown

Sanford Brown is the director of product development at Verisk – insurance solutions.