Guy Carpenter’s Chief Executive Officer, Peter Hearn, made a case for greater industry-wide adoption of the open source catastrophe model, saying it improves firms’ management of risk, adding better products and protection to the marketplace and benefiting the entire re/insurance value chain.
“For over 25 years, these models have led us on a journey toward increased risk understanding,” he said; “a journey that now continues with the availability of open source model environments. Clients and regulators alike want to bring transparency, increased competition, and lower costs to the existing ‘black box’ model so companies can develop their own view of risk.
“The challenge with the ‘black box’ model is people don’t understand the input and output, which are key decision-making variables for insurers and reinsurers.”
In addition, Hearn advocated the open source model as a tool to facilitate collaboration between key industry stakeholders; “the standardized and interoperable hazard, vulnerability and financial modules included in a true open source model facilitate the collaboration of data from insurers, reinsurers, entrepreneurs, scientists, computer programmers and individuals, all of which may result in a new generation of cat models.”
With firms revamping their technological capabilities with a move towards shared systems and platforms, “interoperability” – the sharing of data between different systems – is becoming more feasible.
Hearn commented that interoperability “facilitates the proliferation of multiple scientific views in hazard modules with clients who use their own claims experience to shape vulnerability assumptions and financial engines which better reflect the complex nature of policy coverages.”
Interoperable and transparent catastrophe models stand to benefit both the public and private sectors, and result in improved risk management decisions.
In this era of tech-enabled collaborative network-based distribution and platform building, more and improved information on catastrophe risk could mean a reduction in the protection gap between insured and economic losses as firms improve perils risk management.
Hearn concluded that; “insurers and reinsurers have a fiduciary obligation to understand their risks and the models used to evaluate that risk.
“Insurers must also be empowered to better communicate their risk management decisions to shareholders, policyholders and regulators.
“When companies can make more informed decisions, they are better stewards for the industry.”
The combination of innovations and interoperability in risk modelling technology, abundant sources of risk and reinsurance capital, and growing perils such as cyber and climate change related natural catastrophes, will open up opportunities across the entire re/insurance value chain.
According to Hearn, players that jump aboard the collaborative operating model are likely to be among the best placed with the resources to take advantage of the fast-changing risk sphere.