Cat-Model Conversation: An Interview
with AIR Worldwide CEO Ming Lee
NATIONAL UNDERWRITER: What are the
competitive advantage of AIR Worldwide’s U.S.
Hurricane Model vis-à-vis the competition?
hear from these clients is the unexplainable
nature of the changes in the RMS model—
not the change itself, but the fact the
changes couldn’t be explained very well.
Another point I’d want to make related
to this: Severe storms happen all the time,
and some insurers think they can anticipate
their losses based on historical-claims
information. The catastrophe experience
of 2011 has a lot of companies realizing
that rather than viewing modeling from a
Finally, ask why you should trust the
modeler’s experts—and the answer should
be the extent the model has been peer
reviewed by outside people.
MING LEE: What sets our model apart is its
greater stability over time. It has long been
considered the most consistent, realistic
and comprehensive view of hurricane
risk. From revision to revision, the model
gets more refined and more granular, but
a robust model, which ours is, should
not require dramatic updates. Also,
there is a tremendous amount of
transparency around our model: We
have literally thousands of pages
of documents explaining [our
methodology], and our scientists are
available to answer questions.
NU: Your European wind model has also seen
some recent developments. Tell us about them.
NU: How has the model’s view changed
regarding the extent and severity of
inland losses that hurricanes can cause?
A cat model’s output is
a currency by which risks are
transferred—like money. And like
any currency, a cat model has
value only to the extent there is
confidence in that output.”
MIng Lee, CEO, Air Worldwide
LEE: We’ve always been capturing the risks
from inland losses, and the potential for
these losses is not new. Since 1900, over 60
hurricanes have caused significant inland
losses. From the inception of the AIR model,
we covered Arkansas, Kentucky, Ohio and
other inland states; and in 2010, we added
Illinois, Indiana and Missouri, so the model
now covers a total of 29 states. There has
been a lot of fuss over how hurricane models
changed because of [Hurricane] Ike in 2008
causing a new view of inland risk. That’s just
a lot of fuss about nothing—Ike was not the
first storm to cause inland losses.
historical-claims perspective, they should
take a more scientific approach to their
level of risk.
LEE: In 2011, we expanded the model to
include additional countries, and the latest
version of the AIR Extratropical Cyclone
Model for Europe now captures the
financial impact of European wind
storms on 18 countries. And the 2010
release reflects a lot more realism in
our creation of the simulated storms,
such as explicit modeling of storm
clustering, an important phenomenon
in Europe that must be accounted
for when managing wind-storm risk.
We also added support of additional
business-interruption coverage, and auto
and forestry lines of business.
NU: What advice would you give to a
company considering changing models or
using one for the first time? What questions
should they ask?
NU: And what’s the latest on the terrorism-modeling front?
LEE: Ask the modeler what its approach is
to validation: Do the components of the
model make sense overall—in other words,
how do they make sure the output makes
sense? A company should hear that all
components of the model are validated to
have scientific merit.
A company should investigate how
the model has performed historically. Run
storms that occurred in the past with the
company’s book of business and see what
the model says the losses would be if that
historical storm occurred today.
Also, take a look at how the model
performs in real time: What did the model
say that the losses would be as a storm
occurred, and how does that reflect the
reality of what actually happened?
LEE: We reconvened our team of
experts with experience in military and
government, and they considered the
ability of a full range of terrorist groups
to plan and accomplish a wide variety of
attacks. And based on that analysis, the
revised model reflects a less frequent and
lower severity risk for U.S. terrorism.
NU: Final thoughts?
NU: What impact have the recent changes to
Risk Management Solution’s cat model (RMS
Version 11.0 U.S. Hurricane Model) had on
LEE: There has been growing interest in AIR
over last few years, period. The impact of
the RMS Version 11 release acceleratef that
interest—it has prompted companies to just
have the conversation sooner. What we
LEE: The most important concept to
remember is that a cat model’s output
is a currency by which risks are
transferred—like money. And like any
currency, a cat model has value only to
the extent there is confidence in that
output. And that confidence should rest
on sound science—science that ensures
the numbers make sense. NU