"Eqecat's model will help insurers and energy producers quantify their offshore risks, which can lead to better pricing and use of capital," said Rick Clinton, California-based president of Eqecat, a wholly-owned subsidiary of Houston-based risk management consultancy firm ABS Consulting.
Quantifying risks for offshore property is not straightforward. For example, most damage onshore is due to wind, while offshore damage is primarily caused by severe waves and strong currents generated by a storm, as well as by undersea landslides.
The new model tackles modelling deficiencies revealed after Hurricane Katrina made landfall in August 2005. Eqecat, along with other major catastrophe risk modelling firms Boston, Massachusetts-based Air Worldwide and Newark, California-based Risk Management Solutions, fielded a large amount of criticism after insurers and reinsurers who relied on their risk estimates posted significant losses in the aftermath of the hurricane.
"In 2004 our models did very well. We didn’t exit 2004 thinking there were places where we could really seriously improve the model. But in 2005 the model struggled in several areas and we are addressing them,” said Tom Larsen, senior vice-president of Eqecat.
Earlier this year, the firm produced a supplementary model for insurers and reinsurers to help them understand foreseeable risks in the near-term horizon of eight to 15 years. Previously, the models used historical data covering more than 100 years.