Catastrophe modeling (also known as cat modeling) is the process of using computer-assisted calculations to estimate the losses that could be sustained due to a catastrophic event such as a hurricane or earthquake. Cat modeling is especially applicable to analyzing risks in the insurance industry and is at the confluence of actuarial science, engineering, meteorology, and seismology.
Natural catastrophes (sometimes referred to as "nat cat") that are modeled include:
Hurricane (main peril is wind damage; some models can also include storm surge and rainfall)
Earthquake (main peril is ground shaking; some models can also include tsunami, fire following earthquakes, liquefaction, landslide, and sprinkler leakage damage)
severe thunderstorm or severe convective storms (main sub-perils are tornado, straight-line winds and hail)
Flood
Extratropical cyclone (commonly referred to as European windstorm)
Wildfire
Winter storm
Human catastrophes include:
Terrorism events
Warfare
Casualty/liability events
Forced displacement crises
Cyber data breaches
Cat modeling involves many lines of business, including:
Personal property
Commercial property
Workers' compensation
Automobile physical damage
Limited liabilities
Product liability
Business Interruption
The input into a typical cat modeling software package is information on the exposures being analyzed that are vulnerable to catastrophe risk. The exposure data can be categorized into three basic groups:
Information on the site locations, referred to as geocoding data (street address, postal code, county/CRESTA zone, etc.)
Information on the physical characteristics of the exposures (construction, occupation/occupancy, year built, number of stories, number of employees, etc.)
Information on the financial terms of the insurance coverage (coverage value, limit, deductible, etc.)
The output of a cat model is an estimate of the losses that the model predicts would be associated with a particular event or set of events.
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