Catastrophe Model (Cat Model)
A catastrophe model simulates the frequency and severity of natural catastrophe events and their expected losses to an insured portfolio.
Concept
A catastrophe model is a computer-based simulation model that represents the frequency, intensity, and spatial extent of natural catastrophe events — such as earthquake, windstorm, flood, or hail — and calculates from this the expected insured losses for a specific portfolio.
Model Components
Catastrophe models typically consist of a hazard module (frequency and intensity of physical events), a vulnerability module (the susceptibility of insured properties to damage depending on construction and location), and a financial module (converting the physical loss into an insured monetary loss, taking deductibles, limits, and reinsurance into account).
Relevance for Underwriting and Capital Management
Catastrophe models are an indispensable tool for accumulation control, pricing of natural hazard covers, determining reinsurance structure, and calculating capital requirements under Solvency II; because different model vendors (such as RMS, AIR/Verisk, or CoreLogic) can produce significantly diverging estimates, insurers frequently use multiple models in parallel to address model uncertainty.