Correlation, simulation and uncertainty in catastrophe modeling

Abstract

The science of catastrophic risk modeling helps people to understand the physical and financial implications of natural catastrophes (hurricanes, flood, earthquakes, etc.), terrorism, and the risks associated with changes in life expectancy. As such it depends on simulation techniques that integrate multiple disciplines such as meteorology, hydrology, structural engineering, statistics, computer science, financial engineering, actuarial science, and more in virtually every field of technology. In this paper we will explain the techniques and underlying assumptions of building catastrophe models end to end. We especially will pay attention to correlation (spatial and temporal), simulation and uncertainty in each of the various components in the development process. Our Next Generation Simulation Platform will enable clients (insurance and re-insurance companies) to look at their catastrophe risks objectively while at the same time being able to make use of an open model architecture that opens up the infrastructure of risk modeling.