RMS Calls Criticism “A Fundamental Misunderstanding” of Cat Models
Risk Management Solutions (RMS) says that a recent report saying that short term hurricane models overestimated losses by billions as misplaced.
In an emailed statement, RMS argues that a recent report by Karen Clark & Co. mistakenly characterizes catastrophe models as offering “deterministic” rather than “probabilistic” results.
“RMS welcomes review and debate of the timeframe over which catastrophe models should be used to characterize hurricane risk,” the firm said in the statement. “However, this report demonstrates a fundamental misunderstanding of the purpose of Cat models by asking whether they can be used to predict actual catastrophe experience in a particular one, two, or five-year period.”
Karen Clark & Co. issued its second annual study of near term hurricane models where it argued that AIR Worldwide, EQECAT and RMS projected near term insured loss levels at least 35 percent above the long-term average of $40 billion for the period 2006 through 2010.
Actual losses for the period turned out to be $13.3 billion, according to Clark.
Given the technical arguments made by RMS, the full text of the statement is below:
“RMS welcomes review and debate of the timeframe over which catastrophe models should be used to characterize hurricane risk. However, this report demonstrates a fundamental misunderstanding of the purpose of Cat models by asking whether they can be used to predict actual catastrophe experience in a particular one, two, or five-year period. It’s important to understand that catastrophe models deliver probabilistic forecasts not deterministic predictions. A probabilistic activity forecast means that, on average, over many five-year periods, this is the number of hurricanes to be expected. The actual number experienced in a particular five-year period will be just one sample from a broad distribution of possible outcomes.
Hurricane activity responds to warm sea surface temperatures (SSTs), which have been above the long-term historical average since the early 1990s. While the debate about the cause of increased SSTs continues, there is scientific consensus that the proportion of intense hurricanes (Category 3-5) has increased and that overall hurricane frequency has been significantly higher than the long-term historical average since 1995. The annual average of category 1-5 hurricanes making first landfalls along the U.S. coastline from 1970 to 1994 is close to 1.3, while since 1995 it is around 2.0 per year. Therefore, most hurricane experts believe that simply using the long-term historical average number of hurricanes is not the best way to estimate future activity.”
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