Modelling corporate risk–comment

Claims are important because they can reveal trends, problem areas and emerging risks. They are important both at an individual company or group level, as well as at a macro level. Insurers and loss adjusters are well placed, together with brokers, to provide claims benchmarking data for clients across the whole industry, individual sectors or geographic regions.

Much of the work on claims trends is done for the insurance industry itself, to help insurers identify worrying trends, areas where the underwriting premium is not matching the losses paid out and so have an impact on pricing, and aggregation issues (a problem for large multinational insurers and particularly reinsurers). But it is also used to help insureds identify areas for risk improvement and loss prevention.

The insurance industry, and notably the reinsurance sector, is also very keen on modelling. It is a huge industry in its own right, with companies such as Eqecat, RMS and AIR providing catastrophe models for a range of perils from flood to earthquake to windstorm and hail. But much of the focus is on the insurance and reinsurance industry. However, all of the modelling firms also have corporates as their clients.

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This tends to focus on areas such as property developers, real estate companies, energy firms and very large manufacturers. But it seems clear that with natural catastrophes on the increase, changing weather patterns, climate change, global warming and the like, modelling is perhaps set to play a bigger role in the corporate market. This may come from multinationals working directly with the modelling firms, or perhaps via brokers or insurers.

All the basic drivers of catastrophe model use by the re/insurance industry, i.e. accumulation risk, aggregation, pricing and identification of trends, also applies to many large multinationals and their global insurance programmes.

However, a word of warning: despite their clear value, models have their limitations. There is always the potential for model error-indeed, several recent catastrophes were missed by the models, and their limitations have been exposed. But the models are improving all the time, and more importantly, their scope and size mean that they are increasingly becoming more available to multinationals.