Analyzing and Preparing for Multiple Event Seasons

How can you account for the probability of multiple events in a single year, and what techniques can insurers use to improve their catastrophe risk-management strategies? In this publication, we recap the 2004 hurricane season and examine how unusual it was from both a frequency and insured-loss standpoint. We examine how to evaluate a variety of reinsurance options to prepare for multiple-event seasons in the future.

Challenge
In the aftermath of the 2004 U.S. hurricane season, the industry is turning its attention to the season’s impact on insurance and reinsurance practices and the catastrophe models on which insurers and reinsurers rely to manage their hurricane risk. How can you account for the probability of multiple events in a single year, and what techniques can insurers use to improve their catastrophe risk-management strategies? In this publication, we recap the 2004 season and examine how unusual it was from both a frequency and insured-loss standpoint. We discuss how AIR Worldwide’s process for generating simulated events results in a stochastic catalog that explicitly accounts for the probability of multiple events in a single year, and we examine how to evaluate a variety of reinsurance options to prepare for multiple-event seasons in the future.

Solution
Many clients have asked whether the AIR hurricane model will change as a result of hurricane events. Certainly, we can now include Charley, Frances, Ivan, and Jeanne in the historical catalogs on which we base our models. Since the AIR hurricane model already accounts for multiple-event seasons and the return periods generated are consistent with the past 100-plus years of historical data and meteorological expertise, we expect the effect on frequency to be small. In the aftermath of the season, AIR has initiated studies on other timely topics, including hurricane clustering and seasonality, the effect of the single-season deductibles recently mandated by the Florida legislature, and the effect of multiple events on demand surge. AIR will also collect detailed claims data for each storm to allow our engineers to review damage ratios by location, construction type, and building-code zone. AIR anticipates small changes at a detailed level rather than fundamental or major changes to the model or model results.

Techniques
Since the likelihood of multiple-event seasons is within the range that most companies manage their books, it is critical for insurers and reinsurers to analyze a wide range of scenarios containing multiple-event and multiple-peril seasons.

AIR’s CATRADER® and CLASIC/2TM systems take advantage of AIR catastrophe models to let users easily analyze multiple-event seasons, as well as a wide range of insurance and reinsurance options. Users can determine probabilities of exceeding their existing reinsurance treaties, investigate the efficacy of various alternative reinsurance options, and compare estimated losses for different reinsurance programs to ensure that their company has adequate protection for a multiple-event season.

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