CAT models could help insurers provide policies to more Californians

As a new wildfire season in California is ablaze, answers to questions about insurers’ pricing, underwriting, and exposure management functions resulting from the 2017 and 2018 seasons are still taking shape. According to Milliman estimates, the 2017 wildfire season alone wiped out just over 10 years of underwriting profits for California homeowners insurers. Moreover, the combined 2017 and 2018 wildfire seasons wiped out about twice the combined underwriting profits for the past 26 years, leaving the insurance industry with an aggregate underwriting loss of over $10 billion for the California homeowners line of business since 1991.

A historically profitable line of business has recently become an unprofitable line exposed to a severe peril that is neither easily measured nor fully understood. As a result, wildfire risk has become a key focus of Californians, and their property insurers.

Catastrophe simulation models, or “CAT models,” have been developed for a variety of catastrophic perils, such as hurricanes, floods, winter storms, earthquakes, and wildfires, to provide insurers with scientific techniques to quantify and assess their exposure to catastrophic risk. Recognizing the growing importance of this peril, a number of firms have been working to apply the latest techniques in catastrophe modeling to wildfires.

In their article “Wildfire catastrophe models could spark the changes California needs,” Milliman’s Eric Xu, Cody Webb, and David D. Evans explain how enhanced quantification and understanding of wildfire risk represents one of the most important challenges for property insurers writing business in the Western United States, and how innovations in the field of catastrophe modeling may assist them with this task. 

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