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As catastrophe models expand to cover cyber, terrorism, wildfire, and other “secondary perils,” the Risky Science Podcast spoke with Dirk Schmelzer, Partner at Zurich-based Plenum Investments, about how practitioners actually use models to build portfolios and communicate risk to investors.
Schmelzer, who has managed catastrophe bond and insurance-linked securities (ILS) funds for more than 15 years, emphasized that models are indispensable—but never the sole driver of investment decisions.
“I think trust is only currency that we have to towards our investors,” he said. “Risk modeling is just one of the many tools that we use.”
From Transactions to Portfolios
Plenum applies models at two levels:
- Single transactions – comparing vendor results with Plenum’s in-house modeling and insurers’ actual claims data.
- Portfolios – testing correlations across bonds, running historical stress scenarios, and steering portfolios to align with investor risk profiles.
Schmelzer noted that diversification is critical, but not straightforward: U.S. hurricane models are more robust than those for non-U.S. perils, so exposures outside the U.S. carry extra caution.
Models in a Climate-Driven Market
Models have become more conservative, more expansive in peril coverage, and faster with the move to cloud computing. Yet gaps remain.
“We still see, I would say, a huge discrepancy of how some transactions are modeled,” Schmelzer observed. That gap is one reason Plenum is wary of annual aggregate structures that pick up every secondary event.
While vendors now offer climate-conditioned views of hurricanes, Schmelzer believes models still “play catch up” on perils most affected by warming trends, such as severe convective storms.
The Role of AI and Transparency
Artificial intelligence could help detect overlooked patterns in catastrophe risk. But Schmelzer warned that black-box outputs risk undermining investor trust: “If you suddenly cannot explain why a model produces a certain result, that’s the biggest danger.”
Transparency from vendors has improved, with clearer disclosures around model updates. This, he said, is essential for managers to explain portfolio risk and maintain investor confidence.
Outlook for ILS
Despite spread compression, Schmelzer sees continued demand: “Cat bonds remain attractive as a diversification play compared to other asset classes.” Growth will hinge on economics—whether cedents and investors view traditional reinsurance or alternative markets as offering the better value.
The conversation underscored how practitioners like Plenum balance scientific modeling with fiduciary responsibility—bridging trust, transparency, and diversification in a climate-challenged marketplace.
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