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Management Strategies

03:49 PM
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Battening Down the Hatches

When it comes to predicting low-frequency, high-impact catastrophes, underwriters of risk must rely on thousands of years of scenarios rather than their proprietary loss data. Technology is critical to pulling off this high-stakes juggling act.

Reinsurer Combines Data with Discipline

ACE Global Reinsurance's (Hamilton, Bermuda, $1.31 billion in gross written premiums) catastrophe management strategy is two-fold, reports chief risk officer, Sean Ringsted. "We aim to be as quantitative as possible, and we've coupled that goal with disciplined underwriting," he explains. "This has been the business model that we've followed with great success for 10 years."

Because of the uncertainty of natural disasters, the reinsurer employs multiple models, Ringsted explains. Aside from its homegrown technologies, ACE Global Re uses RMS' RiskLink, EQE International's (San Francisco) WorldCat and AIR's CATools catastrophe modeling technologies. RiskLink provides risk selection, pricing and capacity management tools for catastrophe risk managers, and WorldCat has the ability to assess and control exposures of property portfolios.

CATools, ACE Global Re's latest catastrophe model purchase, is the only model that has been integrated with the reinsurer's proprietary underwriting system, Heuron. CATools is an application programming interface that is offered in both a component-based API version that is compatible with Microsoft (Redmond, Wash.) Windows-based underwriting systems, and a Web-services API that connects with underwriting platforms via the Internet or an intranet.

The CATools integration was ACE Global Re's first attempt at connecting Heuron with a catastrophe model. With the help of AIR, "[ACE Global Re] was able to bypass CATools' user interfaces and directly access its analytic engine, which was dropped into Heuron," Ringsted explains. As a result of the implementation, ACE Global Re's underwriters are able to access AIR's catastrophe loss information directly, without leaving its own underwriting system. CATools' resources include geo-coding, hazard analysis, probabilistic loss analysis and a database to store exposure information and analysis results.

According to Ringsted, the project's minimal up-front costs and time associated with the custom-built integration were well worth its return on investment. "We are able to free up our analysts and underwriters so that they can concentrate on getting data in and out of our software," relates Ringsted. "We have more resources that can be focused on portfolio management and underwriting," rather than collecting information manually from reports. But ACE Global Re hasn't abandoned its other models. Though WorldCat and RiskLink are not integrated into the reinsurer's underwriting system, "all of the results [drawn from each catastrophe model] find their way into the final underwriting process," stresses Ringsted.

Just as reinsurers use catastrophe models to make sure they are not taking on too much risk in the wrong places, primary insurers must employ them to know how much of their own risk to transfer on. Travelers Property Casualty (Hartford, $66 billion in assets), reports Scott Belden, chief risk and reinsurance officer, has been taking advantage of catastrophe models in some form since the 1980s. "When Andrew hit in August 1992, there was very little catastrophe modeling taking place [in the industry]" he explains. "Although our early catastrophe models were pretty rudimentary, we've been using them at Travelers in excess of 20 years."

Broad Range of Assumptions

For the past 10 years, the carrier has licensed models from RMS. Belden explains that its current catastrophe modeling tool provides a range of possible natural disasters, and the impact that different events might have on the physical structures of the properties it insures. "If a structure is a concrete bunker, it's going to sustain less wind damage than a frame house will," Belden explains. "RMS provides a broad range of assumptions about the effects that a range of disasters will have on Travelers' property stock."

The model is able to make such calculations because it is populated with information from Travelers' policy systems. As a result, the carrier is able to obtain an accurate output of potential damage when it runs the report for reinsurance purposes once every year. Armed with this information, Belden has a pretty good idea of how much reinsurance he must purchase in order to protect Travelers.

The insurer also incorporates use of its model on a one-off basis when it comes to underwriting large commercial coverages in certain regions. "If we are looking at a large commercial property located in [a hurricane-prone region such as] Wilmington, N.C.," relates Belden, "we will run it through the model" to get a better idea of potential risks.

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