In the 30 years since the advent of computerised natural catastrophe modelling, cat models have come a long way.


Today, they are a standard feature of an underwriter’s toolkit. Underwriters use them to quantify risk and price it accurately. But in tandem, reinsurers and insurers now use models to assess their own enterprise risk.

But Covid-19 has raised questions. According to P&C models, pandemics are rare – so-called grey swan events that happen once every 100 years or so. Yet during the 20th century, there were three true worldwide outbreaks of influenza – 1918, 1957 and 1968 – plus several near misses in the form of MERS and SARS, not to mention Ebola. So, have we got the probability right?

The pandemic has revealed layers of connections that we will not fully comprehend for years to come. The extent of the pandemic’s impact also exceeds our industry’s estimations. We all knew that people would fall ill and some would sadly die; what we did not predict was the reaction of governments and populations: conspiracy theories, anti-vaxxers, civil unrest, political volatility. Human behaviour, it appears, is exceptionally difficult to predict.

Reframing models

Even after 30 years, we have yet to create a risk model that truly approximates the world as we know it. But what models can do is provide us with an approximation of reality. In order to get the best from models, we have adopted a three pillars principle: the model itself, the data we feed into it and a less quantifiable factor – gut feel.

Data is critical. It’s something reinsurers possess in huge quantities. Even if all our cat models stopped working, our data is sufficient to provide a sound understanding of the present moment. What it does not do in isolation is allow us to make predictions, which is where the models come in. The models provide us with the clues as to what the future will look like and what to base our assumptions on.

Human intuition

The third pillar, gut feel, now comes into play. Catastrophe analysts and underwriters don’t simply use models – they invest hours of their time in understanding the way in which they work, what presumptions they make, what weighting they give to different factors. Our catastrophe analysts and underwriters engage in regular dialogue with a model’s vendor and attend their presentations. Consequently, when an underwriter tells us that their gut feeling is out of sync with a model’s output, we take that seriously.

So, if our clients often tell us that our pricing does not necessarily mirror the wider market, what we’re doing is balancing model output and underwriter sentiment to achieve the right price.

Undiminished influence

Even as the pandemic raises questions, the influence of models remains undiminished – although some might venture that levels of trust in them have been eroded. The impact of models is so powerful that they are one of the few factors that can move the market, as some recalibrations have shown in recent years.

But even the most advanced model is simply a tool to improve underwriting. Make the mistake of treating it as an oracle and the trust you have placed in it is likely to be dented. Even the great oracles of ancient Greece were not infallible. Treat it as a tool whose workings can be guided by a skilled underwriter and the results will be much more valuable.