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Grossi Patricia, Kunreuther Howard (Eds). Catastrophe Modeling: A New Approach to Managing Risk

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Grossi Patricia, Kunreuther Howard (Eds). Catastrophe Modeling: A New Approach to Managing Risk
Springer, 2005. — 252 p.
The goal of this book is to bring the reader up to date on recent developments in the nature and application of catastrophe models used to manage risk from natural disasters. It describes current and potential future uses of such models. The book emphasizes natural disasters, but also discusses application of the models to the terrorist attacks of September 11, 2001. The book is targeted to individuals concerned with monitoring and managing the impact of catastrophe risks. For example: Senior insurance and reinsurance managers can gain insight into the policy implications of competing hazard management strategies. Actuaries and underwriters can learn how catastrophe modeling, in its current form of user-friendly software, can facilitate their portfolio analyses. Federal, state and local government employees can learn to expand their definition of risk management to include the role that insurance can play in protecting their organizations against loss. Structural engineers, proficient in seismic and wind resistant design, can examine the latest approaches to modeling the fragility of a building system. Other experts interested in catastrophe modeling, including earth scientists, computer scientists, economists, and geographers, can discover their role in creating the next generation of models.
Part I of this book provides an introduction to risk management and catastrophe models. Chapter 1 indicates the need to manage risk and describes the key stakeholders involved in the process. Chapter 2 provides an introduction to catastrophe models and insurance. It introduces the components of a catastrophe model and how catastrophe models aid insurers in assessing their portfolio risk. The chapter concludes by introducing a framework for integrating risk assessment with risk management strategies via catastrophe modeling.
Part II of the book delves more deeply into the complex process of linking the science of natural hazards to the output from catastrophe models. Chapter 3 discusses the components of catastrophe modeling in more detail, including the hazard, inventory, vulnerability, and loss modules. This chapter clarifies how data are incorporated into catastrophe models and how modeling techniques facilitate the assessment of earthquake and hurricane risk. Chapter 4 discusses the treatment of uncertainty in a catastrophe model. Catastrophe modeling is an evolving science; there are assorted interpretations and approaches to the modeling process. Differences in the output from competing catastrophe models are presented for hurricane and earthquake risk. Using the Charleston, South Carolina region as an example, the chapter highlights how uncertainty in modeling risks affects estimates of future losses.
Part III examines how catastrophe modeling currently aids insurers and other stakeholders in managing the risks from natural hazards. Chapter 5 focuses on the actuarial principles for insurance rate making. Special emphasis is given to the role of catastrophe modeling in earthquake risk classification and rate setting for residential structures in the state of California. Chapter 6 focuses on the role of catastrophe modeling in quantifying an insurer’s portfolio risk. One of an insurer’s principal concerns when constructing a portfolio of risks is to reduce the possibility of unusually large losses. Special attention is given to ways that models can address uncertainty issues and reduce the chances of highly correlated losses in an insurer’s portfolio. Chapter 7 provides a comprehensive discussion of risk financing for an organization and the regulatory basis for the design of risk transfer instruments. The chapter illustrates the role that catastrophe modeling plays in evaluating these financing schemes and discusses the reasons why there has been limited interest by investors in utilizing new financial instruments.
Part IV illustrates how catastrophe models can be utilized in developing risk management strategies for natural disasters and terrorism. In Chapter 8, insurers consider a specific risk management strategy – requiring homeowners to adopt specific mitigation measures – in determining the pricing of a policy and the amount of coverage to offer. Utilizing data provided by the three leading modeling firms (AIR Worldwide, EQECAT, and Risk Management Solutions), three hypothetical insurance companies are formed to provide earthquake or hurricane coverage to homeowners in Oakland, California, Long Beach, California and Miami/Dade County, Florida. The analyses illustrate the impact of loss reduction measures and catastrophe modeling uncertainty on an insurer’s profitability and likelihood of insolvency. Chapter 9 builds on the analyses presented in Chapter 8 by examining the role of risk transfer instruments in providing protection to insurers against losses from natural disasters. The chapter examines the impact of reinsurance and catastrophe bonds on the profitability of an insurer and the return on assets to investors in the insurance company. Chapter 10 concludes the book by focusing on how catastrophe modeling can be utilized in dealing with terrorism. The chapter examines the challenges faced by the U.S. in providing terrorism coverage after the September attacks. Given the uncertainties associated with this risk and the potential for catastrophic losses, there is a need for public-private partnerships to reduce future losses and provide financial assistance after a terrorist attack.
A Glossary at the end of the book provides definitions of scientific, engineering and economic terms used throughout the book. This should aid the reader in understanding key words that are often used to characterize and analyze risks.
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