The Digital Insurer: What does Catastrophe Risk Modelling really mean?

James Maudslay
The Digital Insurer: What does Catastrophe Risk Modelling really mean?

It seems as if the world is living in the kind of “interesting times” promised by the infamous Chinese saying. Take Asia-Pacific for example, where a season of uncommonly powerful and destructive storms, like the monster Typhoon Hato that caused Hong Kong to grind to a halt; and Hurricane Harvey in the United States just a few months ago, have cost countries billions in damages and exacted a sad toll in human lives.

In monetary terms, global economic losses from disaster events were US$175 billion in 2016, up from US$94 billion in 2015, according to Swiss Re. The insured losses were US$54 billion, up 42% from 2015, and the highest since 2012.

As well as natural disasters, the region also faces man-made risks. They range from serious industrial accidents to terrorism. For most people, such events are unthinkable. But, for insurance companies, thinking about them and the likelihood of an occurrence is a full-time job. Instead of using actuarial tables to calculate probabilities, they have employed the latest information technology.

This process is called Catastrophe Risk Modeling, which leverages digital solutions to create real-time models that are used to generate remarkably accurate catastrophe risk assessments.

The insurance business is growing, but so are the risks

Evaluating these risks has never been more important. Recently earthquakes, storms, floods and wildfires have caused extensive damage, with disaster events claiming around 11,000 victims worldwide last year.

To ensure the most accurate Catastrophe Risk Models, insurance companies need to find ways to get the best possible picture of the risk landscape. They must also add value in an interconnected and data-driven world of online products and services.

The search for solutions is further complicated by increased security concerns and the constantly changing regulatory landscape. However, the answer to these and other challenges may already be here.

Collaboration is the key

The recent collaboration between Equinix, Lloyd’s and the Lloyd’s Market Association (LMA) to enhance a catastrophe risk modeling platform could change the face of the insurance industry.

The Oasis Loss Modeling Framework is potentially one of the most radical shake-ups in the catastrophe modeling sector in years. Hosted in Equinix’s interconnected insurance ecosystem, it gives insurers in the multi-billion-dollar catastrophe insurance market access to a wider range of model providers from around the world.

The Oasis framework comes at a time when catastrophic events appear to be happening with increasing regularity – with insurers often footing the bill. Developed over five years at a cost of US$4 million, the framework is expected to lead to significant savings in modeling in the coming years.

The latest release of the framework has now made it fully open source – encouraging greater collaboration and enabling users to share data and information to further improve their models.

Cloud exchanges can help keep risks at bay

Equinix’s global interconnection platform simplifies the sharing of data between multiple stakeholders in global insurance markets – from life to property and casualty. Market participants directly connect to one another, enhancing the performance of risk modeling systems and the secure consumption of cloud technologies, while lowering IT, bandwidth and network connectivity costs.

This unprecedented level of collaboration, enables insurance companies to enhance their modeling capability – modeling anything from wild fires in Australia to hurricanes in the Americas – to ultimately improve the terms they can offer to their clients.

This, coupled with advanced analytics can lift an insurer’s performance, creating competitive advantage from the more accurate pricing that predictive modelling can bring.

Interconnection at the heart of everything

Digital is transforming every major industry and interconnection, which fuels collaboration, is emerging as the key tool. It enables businesses to scale with the efficiency needed to accommodate the tremendous growth pundits are projecting.

Insurance isn’t immune. According to the Global Interconnection Index published by Equinix to track, measure and forecast the growth of Interconnection Bandwidth, the volume consumed by the banking and insurance industry in Asia-Pacific is expected to become one of fastest growing, increasing by a staggering 71% per annum to reach over 143 Tbps of capacity by 2020.

The reason for this explosion in Interconnection Bandwidth is clear. Insurance companies must be able to do everything electronically, taking structured data, unstructured data and Big Data, and delivering it all together as part of their service.

As the risk landscape continues to evolve, organizations need to build resilience against the unpredictable. With Interconnection, insurers can analyze data from multiple sources in real-time, giving them the ability to underwrite emerging risks that were previously underinsured and better understand different types of threats. By maximizing connections, they are able to minimize risk in a dynamic market.

Interconnection makes it possible for insurers and their partners to get the information they need almost instantly, and process it wherever and whenever they want to. In fact, trying to analyze the torrent of information in a timely fashion without interconnection – relying only on the insurance firm’s own IT resources – is close to impossible.

One thing is certain. To prosper – or simply survive – insurers are going to have to interconnect electronically like never before. As the old Chinese saying suggests, it’s going to be an interesting time.


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James Maudslay Global Head, Insurance
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