Catastrophe Model
A computer simulation that estimates potential losses from natural catastrophes using scientific and actuarial data.
What It Is
A catastrophe model, or cat model, is a sophisticated computer simulation that estimates the probability and severity of losses from natural catastrophe events such as hurricanes, earthquakes, floods, wildfires, and severe convective storms. Cat models combine hazard data (scientific models of natural phenomena), exposure data (location and characteristics of insured properties), vulnerability data (how structures respond to different hazard intensities), and financial data (policy terms, limits, deductibles, and reinsurance structures).
The three major commercial cat model providers are Verisk (AIR), Moody's (RMS), and CoreLogic. Each uses different scientific assumptions and modeling approaches, which can produce significantly different results for the same portfolio. Carriers and reinsurers typically run multiple models and use a blended view for pricing and capital allocation.
Cat models produce several key outputs: the average annual loss (AAL), which represents the expected annual loss from catastrophe events; the occurrence exceedance probability (OEP) curve, showing the probability of exceeding specific loss levels from a single event; and the aggregate exceedance probability (AEP) curve, showing the probability of exceeding specific total annual loss levels. The PML (probable maximum loss) at various return periods (such as the 250-year PML) is derived from these curves.
Why It Matters for Brokers
Cat models drive property insurance pricing in catastrophe-exposed regions. Brokers placing commercial property in hurricane, earthquake, or wildfire zones need to understand that carriers rely on cat model output to set rates, deductibles, and capacity limits. Providing accurate COPE data and location details improves model accuracy and can result in better pricing when the modeled loss is lower than the carrier's initial estimate.
Real-World Example
A broker submits a $45M TIV coastal property account to three carriers. Each runs the submission through different cat models. Carrier A's RMS model produces a 250-year PML of $18M. Carrier B's AIR model shows $14M. Carrier C blends both models at $16M. These different modeled losses result in quoted premiums ranging from $225,000 to $310,000. The broker uses the modeling disparity to negotiate, ultimately securing the account at $255,000 with the carrier whose model produced the most favorable results for this specific location.
Common Mistakes
- 1Submitting property data without accurate geocoding (latitude/longitude), which forces the model to use zip-code-level data that is typically less favorable than site-specific analysis.
- 2Not understanding that different cat model vendors produce different results, missing an opportunity to shop for the most favorable model output.
How brokerageaudit.com Handles This
brokerageaudit.com's Submission Intake module validates COPE data completeness and geocoding accuracy for property submissions, ensuring the information needed for accurate cat modeling is included. The system tracks which cat model each carrier uses, helping brokers anticipate pricing differences between markets for catastrophe-exposed accounts.