RMS CEO Discusses Cat Models at Bermuda Conference

March 1, 2006

Speaking at the World Insurance Forum in Bermuda, Hemant Shah, Risk Management Solutions CEO, warned that insurers should be preparing to increase their reserves for catastrophe losses, not only due to the unprecedented 2005 hurricane season, but also to prepare for a stormy future.

As noted on the Lloyd’s Website (www.lloyd’s.com) Shah said RMS is set to “release three new catastrophe models which will cover the Gulf of Mexico, windstorm, offshore energy and Caribbean risks, on the back of lessons learned from last year’s hurricane season.”

He also indicted that these new models will “take into account the lessons learned from the 2005 hurricane season and the results have the levels of exposure drastically increasing.” Shah stressed the importance of the insurance market working in cooperation with “the modeling firms if the new models were to have the desired impact of allowing insurers to get a better grip on the levels and types of exposures they face.”

Shah would agree with Karen Clark, who heads RMS rival risk modeler AIR, that the industry is facing a problem known in the data processing business under the familiar term “garbage in, garbage out.” Shah stresssed that the “model is only as good as the data it contains. While we have been able to factor in the data we have obtained from the events of last year, as the models continue to develop we need to work with our insurance partners to ensure the information we have is as up to date as possible.”

In a similar plea last November Clark indicated: “Modeled loss estimates are only as accurate as the exposure data input into the catastrophe model. Insurers need to put more emphasis on improving the quality and completeness of their exposure data to improve the accuracy of the catastrophe risk information used by company management,” (See IJ Website Nov. 14, 2005.)

Shah added that as a result of the hurricane season there has been a change in how models are viewed. He noted that they “have never been the complete solution,” in an allusion to the assumed practice of simply plugging data into a model and letting it do the work. “It is just one of the tools which the underwriter has at their disposal to make their decisions.”

“I had feared there would be a reaction to the events of last year and some risk carriers would simply abandon the use of modeling, but what we have found is that the underwriters are looking at the models as a basis for their decisions which are then coupled with the experience and expertise of their staff to come to the final decisions on pricing and exposure levels,” Shah stated in conclusion.

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