Yesterday, Praedicat released a new version of its risk model. It is a breakthrough in many ways and we are excited to make it available to our clients in our software. It incorporates a number of important modeling extensions, but the most important is our new approach to modeling the occurrence form. It also marks the point where we’ve decided not to call ourselves a “casualty catastrophe modeler.” Why would the occasion of a breakthrough in casualty catastrophe modeling cause us to change how we describe ourselves?
If we talk to a casualty insurer about “casualty catastrophe,” we will often hear, “Are you talking about companies that get sued after earthquakes and hurricanes?” No, that’s not what we’re talking about.
When we talk to them about the potential for liability for a latent disease caused by a company’s products resulting in multiple years of insurance written on the occurrence form to pay out at once, and when it is only one of many companies with products causing that latent disease, they say, “That would be a massive catastrophe.” That’s what we’re talking about.
Latency catastrophe is a better name for this problem.
Latency catastrophe modeling requires capturing how diseases emerge from commercial activities over many years. It also crucially requires modeling how it leads to losses on the occurrence form. Six months ago, we finished our project on modeling the occurrence form (which was written up at the time by Carrier Management in the article linked below). Our model captures the idea that, with a latent disease, you can’t know how much will be paid out in a particular policy year. Instead, the losses in a particular year are a probabilistic fraction of total losses over multiple years. We have been rigorously testing the new model with clients on their portfolios, and it is now ready for prime time.
Besides using the new model to understand current underwriting risks, our clients are beginning to use the model to look at legacy risk as well. Emerging risk, latency, legacy, and the occurrence form — these are the issues at the heart of casualty risk. Praedicat now has a full-featured latency catastrophe model to address them.
Summing up the entire mess of possibilities, she concluded, “The occurrence form, when the occurrence is not a single event is a beast.”