The Twilight of Catastrophe Modelers

One interesting idea in Kevin Kelly’s *What Technology Wants* is that technologies undergo a life cycle where they are at first specialized and poorly designed (they just don’t effing work right) and progress to the point where they are ubiquitous.

I am reminded of that by this article on cat models (via Jim Lynch):

Speakers at several recent insurance conferences stressed the need for property insurers and reinsurers to develop their own independent views of catastrophe risk, rather than outsourcing their risk views to third-party vendors. But they differed on exactly how to get to there.

While experts observed that reinsurers and insurers are increasingly using multiple models to inform their views of cat risks (with the smallest insurers enlisting the help of reinsurance brokers to accomplish this), Peter Nakada, managing director of RMS, a Newark, Calif.-based firm, suggested that a multi-parameter view is preferable to a multi-model view…

“Pick one of the giant simulation things and then force the modeling firms to give you the secret sauce from inside the models,” he advised, suggesting that users can then select “multiple points of view on the parameters that run the model” to develop a range of estimates.

Nakada is fighting a serious rearguard action here. RMS overreached with their last update and modeled claims costs skyrocketed. Instead of recanting on their update (unthinkable), they instead downplay the importance of their technical view of the risk. And they’re right. But I wonder if they realize how much pushing the commoditization of their black box will fundamentally change their business.

Kelly would phrase it like this: what happens when open sourced cat models are ubiquitous? How does that affect the industry?

The day may well come when the ‘secret sauce’ of the cat models goes open source and the state of the art is free to all. In that world RMS goes from R&D shop to industry consultant. They’ll provide outsourced analysis and data cleaning services.

They’ll fight like rabid dogs to avoid the billable hour revenue model, since nobody gets rich in businesses that don’t scale, so they’ll need products. Maybe they’ll look to compete with ISO and offer some kind of master database of property values in the US, who knows.

Their heyday, though, is perhaps ending.

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