Re-modeling the models that evaluate risk

Taking a lesson from 2005’s hurricanes, Paul VanderMarck, executive vice president at Risk Management Solutions, a modeling company based in Newark, Calif., said companies need to re-evaluate their loss potential regarding major disasters. Last year’s hurricanes proved that models underestimated risk, he told Insurance Journal at the recent RIMS conference in Honolulu. Consequently, RMS’s insurance models are being updated because communities are more vulnerable than companies originally thought.

Specifically, he said risk models are taking more of a mid-term view of risk, rather than using just long-term historical averages.

“Modeling traditionally has used long-term historical averages,” VanderMarck explained. “Following Hurricanes Katrina, Rita and Wilma, we learned a number of lessons, such as the updates of buildings that suggests they are more vulnerable than we thought before. With the higher period of [hurricane] activity, we’re moving off a long-term view and moving to a forward-looking basis … We’re differentiating risk more, looking at specific types of buildings, years of construction, occupancy, etc., and taking that into account [in the models.]”

Companies are being forced to look more closely at the risks they face to control costs. Thus, VanderMarck said, after a disaster, there are other things besides immediate building damage that can amplify loss that risk managers should examine as well.

“In addition to the post-even demand/ surge, other things that aggregate loss include civil disobedience, theft, vandalism and infrastructure damage” he said. “There is a severe concentration of damage in urban areas. There can be localized pollution and massive business interruption losses.”

He advised risk managers examine the loss potential in those areas. In updating its earthquake risk model, VanderMarck says his company will factor in those scenarios, too.

Topics Hurricane Risk Management