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Aspen Opinion

A Different Type of Model Update

May 9, 2013

How is the underwriting process being affected as catastrophe model vendors embrace open modelling?

Alan Calder, Head of Group Catastrophe Risk Management, Aspen Re, welcomes the recent software platform developments of leading catastrophe model vendors. The move towards open modelling is significant and this not only silences many of the "black box" detractors but, more importantly, allows dynamic application of scientific opinion to the underwriting process.

NEW GENERATION

There are, however, bigger changes afoot to the underlying catastrophe modelling software that promise to deliver a much broader perspective on catastrophe risk irrespective of the specific peril zone in question. These should allow for greater opportunities to develop more customised house views of risk. Such developments are welcomed by Aspen as they underpin a key element of our cat risk strategy, and we are already playing a proactive role in this area.

To date the software platforms have largely been the concern of the catastrophe modelling specialists and it could quite reasonably be argued software has often come second to science and research activities. The current generation of software, although revised from time to time, is often over 10 years old which feels like a lifetime given the furious pace of IT change.

This year has already seen the release of significant ‘next generation’ platforms with a further launch expected soon. EQECAT has launched its new Risk Quantification and Engineering (RQE) platform and AIR has launched Touchstone, both of which are already in use at Aspen. RMS is due to release RMS(one) in 2014, with a major preview in May 2013.

All these major vendors can no doubt highlight specific features that provide unique selling points in relation to their respective systems but there are some common underlying trends. For example, there is more emphasis on visualisation and ease of accessing detailed results to help understand risk drivers through mapping technologies. This is linked with the broader big data trend in IT applications. Some vendors have also developed cloud hosting to enhance performance and operational benefits.

SIGNIFICANT STEP

The move towards more open modelling concepts is even more profound. Crucially, exposure standards are being shared between vendors in a more formal way. Application of different settings and switches to running models has been available for a while. The concept of open modelling takes this a significant step further by allowing the users to customise components such as hazard footprints and vulnerability functions that were previously considered to be intellectual property and not even fully disclosed to the users. This gave rise to frequent 'black box' criticism.

Against this background, there is also a growing influence of specialist niche commercial vendors providing respected new modelling options. Risk Frontiers provides well regarded models for Australia and has plans to expand into Asia. ERN is a specialist for Latin American catastrophe risk and is approved for use by the local insurance regulators. JBA is a growing specialist in flood models, recently releasing Thai and Indian flood models, having first specialised in UK flood. Finally, a new initiative called Oasis is progressing well and aims to provide a different model altogether. Oasis will provide a software kernel that enables research organisations to use their own components of models on a common framework.

UNDERSTANDING AND EVALUATION

Aspen has long recognised the importance of catastrophe risk assessment and the need to evaluate and understand multiple perspectives. Therefore, we work closely with the three major vendors and several specialists as well as conducting in-house R&D. Aspen is also a founder investor in Oasis, along with several of our peers.

Aspen has a long track record of developing in-house software platforms to manage our modelled outputs efficiently and effectively. Initially, this was to address the weaknesses of vendor software as effective portfolio tools but more recently, in the next generation award winning Apex platform, to provide a consistent implementation of the house view of risk. Apex is Aspen's proprietary platform and facilitates full blending of models for both pricing and accumulations, and more fundamental adjustments from our in-house R&D team. For example, internally developed tsunami scenarios are aligned with vendor models in various major earthquake zones such as Japan and the Pacific North West coast of the US and Canada. Aspen's investment in R&D is growing, and the critical importance of ensuring that the valuable insights of our scientists can be accessed directly at the point of underwriting is recognised.

Blending models is not without its challenges including technical, organisational and operational hurdles. The benefits to multiple views of risk are significant, particularly when internal research and models are incorporated to produce an in-house view of risk. The benefits include the ability to address 'non-modelled' perils, understand model differences and to improve the confidence level in downstream usage such as capital modelling.

Aspen has made significant progress over the past 10 years but recognises there is more to do. We have, therefore, formed a Joint Development Partnership (JDP) with RMS to develop RMS(one) and further advance the concept of open modelling. One key attraction is that RMS is forming partnerships with other vendors such as Risk Frontiers, a model Aspen also licenses, to allow models to be run on one software platform which produces significant operational benefits. Vendors who innovate and provide their own distinctive offerings will continue to be valued and respected. For example, Aspen's partnership with SpatialKey delivers a cloud based pricing support application for UK flood that includes JBA's detailed insights into UK flood risk, while minimising operational cost and complexity.

COHERENT ADJUSTMENT

The major benefit of open modelling, regardless of the mix of models involved or the peril concerned, is the ability to implement a fully coherent adjustment of all key components. Open modelling allows dynamic application of scientific opinion to a portfolio in a much more efficient way to help increase confidence that appropriate underwriting decisions are being made.

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