Vendor catastrophe model

Category: Pricing & rating · Reviewed by Amy Price, Account Executive · Last reviewed

Vendor catastrophe model

A vendor catastrophe model is a commercially-licensed cat modelling product supplied by a third-party software provider for use by insurers, reinsurers and brokers. The dominant vendors are Moody’s RMS, Verisk AIR, CoreLogic and JBA Risk Management (flood specialist).

Strengths

• Substantial R&D investment in physical modelling that no individual insurer could replicate.
• Periodic recalibration to new science and post-event data.
• Multi-region, multi-peril coverage.
• Industry-standardisation of methodology, easing cedent-reinsurer comparisons.

Limitations and “model risk”

• Different vendors produce materially different loss estimates for the same portfolio and peril — sometimes 30-50% apart.
• Vendor model “version churn” (e.g. RMS v17 vs v18 vs v22) requires constant re-pricing.
• Vendor models embed assumptions not always transparent to users.
• Tail behaviour (>1-in-250 year) is poorly constrained by data.

Use of multiple models

PRA SS18/13 and Lloyd’s catastrophe guidance both expect material catastrophe-exposed (re)insurers to consider multiple vendor views as part of their view-of-risk. Internal model firms must show evidence of:

• Multi-model comparison.
• Reasoned justification for the “house view”.
• Sensitivity to vendor model updates.
• Override and view-of-risk adjustment governance.

References

• PRA SS18/13.
• Lloyd’s Realistic Disaster Scenarios.
• Grossi and Kunreuther (2005).

Cross-references

• Catastrophe model
• RMS catastrophe model
• AIR catastrophe model

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Maintained by Matt Bartlett, Director, Apex Insurance Brokers Limited. FCA FRN 724952. Companies House 07014570.