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5 key trends in Nordic Cat Risk Modelling

On the 21st of June 2017, Boat Services, in partnership with Oasis andEquinix, held the first Nordic Catastrophe Risk Modelling conference. The event was well attended by the top (re)insurance companies and brokers in the Nordics with excellent points raised by both the speakers and the audience. This article discusses the points raised and highlights the key trends we learned from the conference.


 

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DEMAND FOR
NEW AND IMPROVED 
MODELS

(Re)insurers should be looking at a broader suite of models to gain a deeper understanding of risk. Cat models have developed significantly over the past 20 years within the global insurance industry, however, little has changed in the model marketplace during this time. In the Nordic region, there is a strong demand for new and improved flood and hail models to better understand events such as the flooding and cloudburst in central Copenhagen on the 2nd of July 2011 which caused 150mm of rain in two hours resulting in approximately €1 billion in insured claims. Supported by the widespread opinion that (re)insurers should be looking at a broader suite of models to gain a deeper understanding of risk, (re)insurance companies in the Nordics need to be modelling more perils than they do today. However, there is not enough choice in today’s marketplace to do so.

 
 


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TOO LITTLE FOCUS ON
VULNERABILITY 
DATA

Nordic models focus too much on hazard data and not enough on vulnerability. There is a consensus that model development in the Nordics focus too much on hazard data and not enough on vulnerability. However, according to the Oasis LMF, vulnerability is in many ways the most critical element of risk modelling (Oasis LMF, 2017), yet it is rarely given enough weight in cat risk model calculations. As a result, model outputs become inaccurate and event analysis becomes unreliable. Further to this, mdel providers often overcompensate for the lack of vulnerability data by applying various assumptions and tweaks to their models. However, the tweaks and assumptions applied are rarely disclosed to model users which ties into another recurring concern in the Nordic market: the lack of transparency in the vendor model development process.

 


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LACK OF TRANSPARENCY  

IN VENDOR MODEL DEVELOPMENT PROCESS

Cat risk model developers do not supply enough supporting model information. It was generally accepted among speakers and delegates that current cat risk models do not supply enough supporting information. This leaves (re)insurers confused about why model output varies from model to model, unsure of how to tune models and unaware of how much data (such as climate change data) is included in the model development.

 


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IMPACT OF 

CLIMATE CHANGE   
IN THE NORDIC MARKET

We will see more catastrophe related events linked to climate change. When discussing future events, academics are predicting that we will see more catastrophe related events linked to climate change. (Re)insurers therefore need to be ready for perils they haven’t experienced before in the Nordic region and a higher frequency of catastrophes such as windstorm and flood. This highlights the importance of collaboration between (re)insurance companies, cat model developers and academia. In fact, (according to Accenture’s 2017 Technology Vision research), the biggest innovations in insurance over the next three years will not be in the technology tools themselves, but in how we design them with employees, customers, intermediaries and other human partners in mind.

 


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BARRIERS TO 

COLLABORATION

(Re)insurers and brokers are still reluctant to share detailed data. Sven Halldin, Senior Professor at Karlstad and Uppsala University, believes that “cat modelling is one of the only tools that can truly improve the interdisciplinary collaboration in the industry”. However, (re)insurers and brokers are still reluctant to share detailed data, which limits how much research academics can apply to the problems faced by the (re)insurers. In order to improve the cat risk modelling marketplace (re)insurers need to be more open to sharing data and embrace collaboration. A country we can learn from here is Norway, who is addressing these data protection issues at a National level and are working on how the insurance industry can use their damage data to benefit government and local municipalities in resilience work and in modelling (Mia Ebeltoft, Finance Norway, 2017) . Norway is also addressing the insurance loss data sharing and protection issues on a European and international level under the work of the Paris agreement and Sendai Framework for disaster risk reduction - which will set standards for future legislation. This with focus on how to take care of the sensitivity of the loss data.

 

 
IMPROVING THE
CAT RISK MODELLING 
MARKETPLACE

New players are entering the market and disrupting the long-standing status quo. Despite the slow pace of change in the cat risk modelling marketplace over the past 20 years, there are new players entering the market and disrupting the long-standing status quo. Boat Services have brought to market ModEx: the multi-peril cat risk modelling platform, partnering with market leaders and technology experts: Oasis and Equinix. ModEx delivers a new ecosystem of cat risk modelling services and tools to the (re)insurance industry providing them with a deeper understanding of risk. The platform operates on the Oasis Loss Modelling Framework (LMF) and delivers a flexible, scalable and secure shared cat risk modelling service. Designed to be highly accessible and to easily cater for additional models, the platform makes it simpler for (re)insurance companies to adopt to new models. By creating a marketplace where vendors can make their models available via a single user interface, the platform lowers the barriers to entry in the cat model marketplace and encourages the development of new and improved cat risk models. Oasis LMF (a not-for-profit organisation) was developed to encourage openness and transparency in model development and create a community that increases the quality and supply of cat models. Collaboration is a key component of the Oasis community where members can actively work with cat model vendors and other market participants to improve the way models are developed. By operating on Oasis LMF, ModEx unifies cat modelling standards, adding transparency to cat modelling globally.

 

 
SUMMARY

In summary, there is an appetite in the Nordic region for further cat modelling capability and a more diverse portfolio of models. Whether this comes from development of models from commercial providers, or in-house models in collaboration with academia, Oasis provides the loss modelling framework and Boat Oasis facilitates model deployment and integration with other insurance applications across the region.
 

 
Event Overview
Set in Stockholm, the Nordic Cat Risk Modelling Conference looked at the current limitations in regional catastrophe (cat) risk models, before exploring possible solutions for the marketplace. Collaboration between academia and industry for stimulating model development and improving the overall understanding of cat risk in the region was one such opportunity mooted. The conference featured industry experts in the field of cat risk modelling, including:
  • Dance Zurovac-Jevtic - Senior Atmospheric Specialist at Sirius International
  • Sven Halldin – Senior Professor in Hydrology at Uppsala University
  • Anna-kitty Ekstam - Head of Reinsurance and If P&C
 
“The Nordic Cat Risk Modelling conference was a success for many reasons, but one of the
interesting takeaways is that so many companies have been experiencing the same challenges for a long time, yet little has been done to improve the landscape. Boat Oasis is at the forefront of solving these industry challenges and we are thrilled to be driving the change this industry needs.”


Jamie Khurshid, CEO of Boat Services.  


 
 

 
References: 
Oasis Loss Modelling Framework Ltd, 2017, http://www.oasislmf.org/the-framework/framework-components/
Accenture’s Technology Vision 
Research, 2017  www.accenture.com/us-en/insight-insurance-technology-vision-2017
Using insurance claims data to strengthen municipalities’ efforts to prevent climate-related natural hazards, Mia Ebeltoft, Finance Norway, 10 July 2017 http://drmkc.jrc.ec.europa.eu/overview/Documents#documents/433/details/6951/using-insurance-claims-data-to-strengthen-municipalities-efforts-to-prevent-climate-related-natural-hazards