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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). This article refers to the study of dynamical systems For other meanings see Catastrophe.

Catastrophe modeling (also known as cat modeling) is the process of using computer-assisted calculations to estimate the losses that could be sustained by a portfolio of properties due to a catastrophic event such as a hurricane or earthquake. A computer is a Machine that manipulates data according to a list of instructions. Cat modeling is especially applicable to analysing risks in the insurance industry and is at the confluence of actuarial science, engineering, meteorology, and seismology. Insurance, in Law and Economics, is a form of Risk management primarily used to hedge against the Risk of a contingent loss Actuarial science is the discipline that applies mathematical and statistical methods to assess risk in the Insurance and Finance Engineering is the Discipline and Profession of applying technical and scientific Knowledge and Meteorology (from Greek grc μετέωρος metéōros, "high in the sky" and grc -λογία -logia) is the Interdisciplinary Seismology (from Greek grc σεισμός seismos, "earthquake" and grc -λογία -logia) is the scientific study of Earthquakes

Contents

Perils analysed

Natural catastrophes (sometimes referred to as "nat cat") include:

Other catastrophes include:

Lines of business modeled

Input

The input into a typical cat modeling software package is information on the properties being analyzed. A tropical cyclone is a storm system characterized by a low pressure center and numerous Thunderstorms that produce strong winds and Flooding An earthquake is the result of a sudden release of energy in the Earth 's crust that creates Seismic waves Earthquakes are recorded with a Seismometer A tornado is a violent rotating column of air which is in contact with both the surface of the earth and a Cumulonimbus cloud or in rare cases the base of a Cumulus A flood is an overflow of an expanse of water that submerges land a deluge A storm is any disturbed state of an astronomical body's atmosphere, especially affecting its surface and strongly implying Severe weather. Hail is a form of precipitation which consists of balls or irregular lumps of ice (hailstones A wildfire, also known as a wildland fire, forest fire, brush fire, vegetation fire, grass fire, Peat fire, Terrorism is the systematic use of terror especially as a means of coercion War is an international relations Dispute, characterized by organized Violence between National Military units This is referred to as the exposure data, since the properties are exposed to catastrophe risk. The exposure data can be categorized into three basic groups:

Output

The output is estimates 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 or "a magnitude 8. Hurricane Katrina of the 2005 Atlantic hurricane season was the costliest hurricane, as well as one of the five deadliest in the history of the United States 0 earthquake in downtown San Francisco" could be analyzed against the portfolio of exposures.

Uses

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 to purchase. Reinsurance is a means by which an Insurance company can protect itself against the risk of losses with other insurance companies 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. A M Best Company Inc, headquartered in Oldwick New Jersey, is Rating agency designated as an Nationally Recognized Statistical Rating Organization Standard & Poor's ( S&P) is a division of McGraw-Hill that publishes financial research and analysison Stocks and bonds. Reinsurers and reinsurance brokers use cat modeling in the pricing and structuring of reinsurance treaties. Likewise, cat bond investors, investment banks, and bond rating agencies use cat modeling in the pricing and structuring of catastrophe bonds. Catastrophe bonds (also known as cat bonds) are risk-linked Securities that transfer a specified set of risks from a sponsor to Investors They are often

Demand surge

Some cat models allow the user the option of including demand surge in the loss estimates, which is post-event inflation. In economics inflation or price inflation is a rise in the general level of prices of goods and services over a period of time After a large disaster, construction material and labor can temporarily be in short supply, so construction costs are inflated. The larger the impact of the event on the local economy, the larger the effect of demand surge. For example, an event that causes a $5 billion insurance industry loss might cause demand surge to increase construction costs by 5%, while an event that causes a $40 billion insurance industry loss might cause demand surge to increase construction costs by 25%.

See also

External links

HAZUS (abbreviation for HAZ ards U nited S tates is a GIS -based Natural hazard loss estimation software package developed and freely
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