:''This article refers to the use of computers to estimate losses caused by disasters. For other meanings of the word catastrophe, including catastrophe theory in mathematics, see catastrophe (disambiguation).'' Catastrophe modeling (also known as cat modeling) is the process of using

computer A computer is a machine that can be programmed to carry out sequences of arithmetic or logical operations ( computation) automatically. Modern digital electronic computers can perform generic sets of operations known as programs. These prog ...

-assisted calculations to estimate the losses that could be sustained due to a catastrophic event such as a hurricane or earthquake. Cat modeling is especially applicable to analyzing risks in the

insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...

industry and is at the confluence of actuarial science,

engineering Engineering is the use of scientific principles to design and build machines, structures, and other items, including bridges, tunnels, roads, vehicles, and buildings. The discipline of engineering encompasses a broad range of more speciali ...

meteorology Meteorology is a branch of the atmospheric sciences (which include atmospheric chemistry and physics) with a major focus on weather forecasting. The study of meteorology dates back millennia, though significant progress in meteorology did no ...

, and

seismology Seismology (; from Ancient Greek σεισμός (''seismós'') meaning "earthquake" and -λογία (''-logía'') meaning "study of") is the scientific study of earthquakes and the propagation of elastic waves through the Earth or through other ...

Catastrophes/ Perils

Natural catastrophes (sometimes referred to as "nat cat") that are modeled include: *

Hurricane A tropical cyclone is a rapidly rotating storm system characterized by a low-pressure center, a closed low-level atmospheric circulation, strong winds, and a spiral arrangement of thunderstorms that produce heavy rain and squalls. Dep ...

(main peril is wind damage; some models can also include

storm surge A storm surge, storm flood, tidal surge, or storm tide is a coastal flood or tsunami-like phenomenon of rising water commonly associated with low-pressure weather systems, such as cyclones. It is measured as the rise in water level above the ...

and rainfall) *

Earthquake An earthquake (also known as a quake, tremor or temblor) is the shaking of the surface of the Earth resulting from a sudden release of energy in the Earth's lithosphere that creates seismic waves. Earthquakes can range in intensity, fr ...

(main peril is ground shaking; some models can also include

tsunami A tsunami ( ; from ja, 津波, lit=harbour wave, ) is a series of waves in a water body caused by the displacement of a large volume of water, generally in an ocean or a large lake. Earthquakes, volcanic eruptions and other underwater exp ...

, fire following earthquakes,

liquefaction In materials science, liquefaction is a process that generates a liquid from a solid or a gas or that generates a non-liquid phase which behaves in accordance with fluid dynamics. It occurs both naturally and artificially. As an example of th ...

, landslide, and sprinkler leakage damage) * severe

thunderstorm A thunderstorm, also known as an electrical storm or a lightning storm, is a storm characterized by the presence of lightning and its acoustic effect on the Earth's atmosphere, known as thunder. Relatively weak thunderstorms are some ...

or severe convective storms (main sub-perils are

tornado A tornado is a violently rotating column of air that is in contact with both the surface of the Earth and a cumulonimbus cloud or, in rare cases, the base of a cumulus cloud. It is often referred to as a twister, whirlwind or cyclone, alt ...

, straight-line winds and

hail Hail is a form of solid precipitation. It is distinct from ice pellets (American English "sleet"), though the two are often confused. It consists of balls or irregular lumps of ice, each of which is called a hailstone. Ice pellets generally fal ...

) *

Flood A flood is an overflow of water ( or rarely other fluids) that submerges land that is usually dry. In the sense of "flowing water", the word may also be applied to the inflow of the tide. Floods are an area of study of the discipline hydrol ...

Extratropical cyclone Extratropical cyclones, sometimes called mid-latitude cyclones or wave cyclones, are low-pressure areas which, along with the anticyclones of high-pressure areas, drive the weather over much of the Earth. Extratropical cyclones are capable ...

(commonly referred to as European windstorm) *

Wildfire A wildfire, forest fire, bushfire, wildland fire or rural fire is an unplanned, uncontrolled and unpredictable fire in an area of combustible vegetation. Depending on the type of vegetation present, a wildfire may be more specifically identi ...

* Winter storm Human catastrophes include: *

Terrorism Terrorism, in its broadest sense, is the use of criminal violence to provoke a state of terror or fear, mostly with the intention to achieve political or religious aims. The term is used in this regard primarily to refer to intentional violen ...

events *

Warfare War is an intense armed conflict between states, governments, societies, or paramilitary groups such as mercenaries, insurgents, and militias. It is generally characterized by extreme violence, destruction, and mortality, using regu ...

* Casualty/liability events *

Forced displacement Forced displacement (also forced migration) is an involuntary or coerced movement of a person or people away from their home or home region. The UNHCR defines 'forced displacement' as follows: displaced "as a result of persecution, conflict, ...

crises * Cyber data breaches

Lines of business modeled

Cat modeling involves many lines of business, including: *Personal property * Commercial property * Workers' compensation * Automobile physical damage * Limited liabilities * Product liability * Business Interruption

Inputs, Outputs, and Use Cases

The input into a typical cat modeling software package is information on the exposures being analyzed that are vulnerable to catastrophe risk. The exposure data can be categorized into three basic groups: * Information on the site locations, referred to as geocoding data (street address, postal code, county/CRESTA zone, etc.) * Information on the physical characteristics of the exposures (construction, occupation/occupancy, year built, number of stories, number of employees, etc.) * Information on the financial terms of the insurance coverage (coverage value, limit, deductible, etc.) The output of a cat model is an estimate of the losses that the model predicts would be associated with a particular event or set of events. When running a ''probabilistic'' model, the output is either a probabilistic loss distribution or a set of events that could be used to create a loss distribution; probable maximum losses ("PMLs") and average annual losses ("AALs") are calculated from the loss distribution. When running a ''deterministic'' model, losses caused by a specific event are calculated; for example,

Hurricane Katrina Hurricane Katrina was a destructive Category 5 Atlantic hurricane that caused over 1,800 fatalities and $125 billion in damage in late August 2005, especially in the city of New Orleans and the surrounding areas. It was at the time the cost ...

or "a magnitude 8.0 earthquake in downtown San Francisco" could be analyzed against the portfolio of exposures. Cat models have a variety of use cases for a number of industries, including: *Insurers and risk managers use cat modeling to assess the risk in a portfolio of exposures. This might help guide an insurer's underwriting strategy or help them decide how much

reinsurance Reinsurance is insurance that an insurance company purchases from another insurance company to insulate itself (at least in part) from the risk of a major claims event. With reinsurance, the company passes on ("cedes") some part of its own ins ...

to purchase. * Some state departments of insurance allow insurers to use cat modeling in their rate filings to help determine how much premium their policyholders are charged in catastrophe-prone areas. * Insurance rating agencies such as A. M. Best and Standard & Poor's use cat modeling to assess the financial strength of insurers that take on catastrophe risk. * Reinsurers and reinsurance brokers use cat modeling in the pricing and structuring of reinsurance treaties. * European insurers use cat models to derive the required regulatory capital under the Solvency II regime. Cat models are used to derive catastrophe loss probability distributions which are components of many Solvency II internal capital models. * Likewise, cat bond investors, investment banks, and bond rating agencies use cat modeling in the pricing and structuring of a

catastrophe bond Catastrophe bonds (also known as cat bonds) are risk-linked securities that transfer a specified set of risks from a sponsor to investors. They were created and first used in the mid-1990s in the aftermath of Hurricane Andrew and the Northridg ...

Open catastrophe modeling

The Oasis Loss Modelling Framework ("LMF") is an open source catastrophe modeling platform. It developed by a nonprofit organisation funded and owned by the Insurance Industry to promote open access to models and to promote transparency. Additionally, some firms within the insurance industry are currently working with the Association for Cooperative Operations Research and Development ( ACORD) to develop an industry standard for collecting and sharing exposure data.

References

External links