- ■ Monte Carlo Model Warning
- ■ California Quake Model Update Planned
- ■ Wildfire's Built Blindspot
Reinsurers Signal Cat Model Updates That Will Reshape Risk Assessment, Pricing
The next 12 months represent a crucial period for catastrophe modeling, with significant model updates expected that could fundamentally alter how the industry approaches risk assessment and pricing, according to new reports from Howden Re and Swiss Re Institute.
Howden Re's latest analysis, released during the annual Rendez-Vous de Septembre (RVS), identifies this timeframe as particularly crucial for severe convective storm (SCS) models, stating that existing models "are undergoing, or are expected to undergo, significant updates over the next 12 months."
The timing is critical as Howden notes that current SCS models have "well-recognised limitations, especially in capturing the peril's high frequency."
This modeling challenge comes as the industry grapples with a transformed risk landscape. Swiss Re Institute's comprehensive market analysis reveals that "perils once deemed 'secondary', such as severe convective storms, floods and wildfires, have become more dominant in aggregate, outpacing traditional 'peak' perils like tropical cyclones, earthquakes and European windstorms."
The modeling deficiencies have real-world implications for risk retention strategies. Howden Re reports that despite market softening, "carriers continue to absorb most losses, retaining 62% of all historical modelled nat-cat exposure at 1 January 2025." This concentration of risk at the cedent level underscores the urgent need for improved modeling capabilities.
Stefan Golling, Member of the Board of Management of Munich Re, reinforced this theme during his presentation in Monte Carlo, noting that climate change impacts "both the frequency and the severity of natural catastrophes, and is testing again and again the limits of our risk models and is leading to higher insured losses."
Swiss Re's analysis supports this concern, noting that "Model uncertainty, emerging risks and inflation risks mean claim trends are uncertain with upside risks." The institute's research shows that actual catastrophe losses have frequently exceeded projections, with carriers in most regions increasing loss budgets substantially since 2019.
Both reports highlight a fundamental shift in loss patterns that current models struggle to capture. While traditional catastrophe models were designed around low-frequency, high-severity events that penetrate reinsurance layers, the new reality features higher-frequency events that primarily impact insurer retentions. This dynamic is reshaping both the economics of risk transfer and the strategic value of modeling accuracy.
Howden Re suggests this renewal season offers "a strategic window to re-assess SCS accumulation management, particularly as models are undergoing... significant updates over the next 12 months." However, the firm cautions that while technical updates may occur within this timeframe, "it will take time for the (re)insurance industry to adopt a new perspective" on these enhanced modeling capabilities.
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