About Catastrophe Modeling

What is catastrophe modeling?

Both natural catastrophes— earthquakes, hurricanes, tornadoes, wildfires, and floods—and man-made disasters, including terrorism and extreme casualty events, can jeopardize the financial well-being of an otherwise stable, profitable company. In the case of these rare but severe events, historical loss information is often unreliable in assessing future loss potential – that where catastrophe modeling comes in.

Catastrophe modeling is the practice of using computer programs to mathematically represent the physical characteristics of natural catastrophes, terrorism, pandemics, and extreme casualty events.

How models work

Built from the most current scientific data available, Verisk extreme event risk models capture how catastrophes behave and impact insurable assets using sophisticated simulation methods. All Verisk models are based upon a specialized framework:

Event Generation: Large catalogs of simulated events capture the frequency, severity, location, and other characteristics of the entire spectrum of plausible catastrophes
Local Intensity Calculation: For each simulated event, the intensity of the hazard is calculated at each affected site
Exposure Data: Information about the property, replacement value and physical characteristics, is input into the model
Damage Estimation: Physical damage is calculated for each affected exposure
Insured Loss Calculation: Policy terms and conditions are applied to estimate insured losses

What Verisk Extreme Event Risk models provide

Detailed output from Verisk models is the basis for understanding and quantifying catastrophe risk. It is the "currency" by which risk is priced, transferred, and traded, and applications today go far beyond those within the insurance industry. Critical metrics produced by Verisk models include:

Article

Average Annual Loss (AAL)

AAL is the loss that can be expected to occur per year, on average, over a period of many years.

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Report

Exceedance Probability (EP)

The likelihood that a loss of any given size (or greater) will occur in the coming year.

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Tail Value at Risk (TVaR)

The expected value of loss beyond a specific exceedance probability.

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Related resources

Learn more about the fundamentals of catastrophe modeling through expert-developed content.

Brochure

Modelling Extreme Event Risk

Both natural catastrophes—earthquakes, hurricanes, tornadoes, and floods—and man made disasters, including terrorism and extreme casualty events, can jeopardize the financial well-being of an otherwise stable, profitable company.

Download the brochure