CAT Management Technology a Maturing Science

The widespread devastation from the recent earthquake and tsunami in Japan follows a string of major natural and manmade disasters -- including the New Zealand and Haitian earthquakes, severe winter storms across the continental U.S., flooding in Australia and even the BP oil spill -- that have presented insurers with unprecedented tests of their catastrophe risk analysis and management capabilities. What have these disasters revealed about the insurance industry's ability to forecast, analyze and underwrite catastrophe risks? What tools and technologies do insurers need to manage these risks and respond to policyholders when catastrophe strikes? --Peggy Bresnick Kendler

The industry's ability to forecast, analyze and underwrite catastrophes is a mixed picture. The available catastrophe modeling tools and data sets are much more sophisticated than five or 10 years ago. That said, the ability to forecast frequency and severity for a given set of exposures is still a mix of art and science.

Hurricane Katrina was a major turning point for the insurance industry. It demonstrated the need to prepare in qualitatively different ways for the operational challenges of huge catastrophes that wipe out infrastructure over broad geographies (no power, no communications, no street signs, etc.). The major insurance companies have developed their own self-contained infrastructure: power, workspaces, food and shelter for adjusters, GPSs, satellite links and so forth. They also have experience mobilizing large numbers of adjusters to send into a small geographic area.

Technology can have a positive impact on insurers' ability to deal with catastrophes. Many insurance companies are upgrading their core claims systems and making them much more scalable and usable by large numbers of "auxiliary" (internal and external) claims adjusters mobilized for a major catastrophe. From the perspective of understanding the financial and solvency impacts of catastrophic risks, enterprise risk management technology has also become much more sophisticated.

Donald Light is a senior analyst with Boston-based Celent.