Simulating the hazard rather than the loss

Karen Clark, president and chief executiveKaren Clark & Company

For the past 20 years insurance companies have been using exceedence of loss probabilities, such as 1% and 0.4%, to quantify and manage catastrophe risk. One-in-100 and one-in-250-year probable maximum losses (PMLs) are used by rating agencies and regulatory bodies. These numbers are interesting mathematically and are readily derived from the catastrophe model-generated exceedence probability (EP) curves, but they do not provide intuitive or robust risk metrics for managing the risk.