Lloyd’s Head of Exposure Management Calls for ‘Open Source’ Models

October 19, 2006

In an address to the 20th Annual International Reinsurance Congress in Bermuda, Lloyd’s Head of Exposure Management, Paul Nunn, suggested that the time was right for the industry to develop the concept of “open source” risk modeling. He indicated that the “industry needs a better appreciation of model uncertainty when preparing for major catastrophes to ensure that they are not over-exposed when disaster strikes.”

In a report summarized on the Lloyd’s Website (www.lloyds.com), he indicated that “at present, all but a few insurers and reinsurers rely on just one catastrophe risk model to understand disaster risk. This ‘singular’ view of risk leaves businesses in the dark as to the sensitivities around the choices modelers take around parameterization of the various model components.” Jack Graham, CEO of I-Cat, referred to this phenomenon as “delusional exactitude” which can lead to poor portfolio management and risk transfer decision-making.

Nunn said that an open source platform would allow an insurer to choose from a suite of hazard modules, some from the traditional loss modelers on a proprietary basis and some from the wider academic community. This would provide users with a plurality of modeled views of risk, which would help users more intuitively appreciate the range of answers depending on the choice of assumptions.

“Open source modeling will present a platform where user can more easily see the levels of uncertainty within a risk, which would be healthy for the industry,” Nunn stated. “Following the 2005 US hurricane season, the agencies learned a number of lessons and went away and came back with radically new models. This actually gives the industry, including rating agencies and regulators, serious challenges to adapt to a changed world view.”

He also noted that at “present, we have three major cat model agencies which are trying to cover peril territories across the world and development resources are increasingly stretched. There is a huge amount of academic and governmental research which the industry should be able to access to supplement existing models.”

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