Moody's Rahnama: If Hurricane Otis had hit Miami it could have caused $100bn in losses

The industry isn’t adequately prepared to calculate its exposure to large catastrophe losses, according to Mohsen Rahnama, managing director and head of modelling and data for Insurance Solutions at Moody’s.

“Otis, a Category Five hurricane with winds exceeding 200 miles per hour, impacted many high-rises and hotels along the [Mexican Pacific] coast, causing significant damage.”

“Six months after the event, we sent a team to assess the aftermath, gather information, and understand the extent of the damage. We learned a lot. If this had happened in Miami, a Category Five hurricane would have resulted in more than $100bn in losses,” he added.

Rahnama also referenced an historical earthquake of similar magnitude: “The recurrence of the 1923 Tokyo earthquake could lead to more than $1.1tn in economic losses and over $150bn in insured losses,” Rahnama explained.

When discussing preparedness for large natural catastrophes, Rahnama outlined three areas where the industry could improve.

The first area in which Rahnama said the industry could improve was collation and use of data for risk selection.

“We need to use the data. We need to use better technology. We need to use a much more robust approach.

“We need to get better risk selection. To do this, you need to have good technology, a good model, and good data. [Combining] all that allows [analysts] to select the risk better, really manage the risk, and then assess the capacity,” said Rahnama.

His second point was that the industry could use data to help educate clients on how to avoid causing man-made catastrophes.

“Around 10 percent of the loss from fire is initiated by utility companies. An enormous amount of mitigation could be done by making the infrastructure more resilient,” said Mohsen.

Finally, Rahnama stressed the importance of regulatory collaboration between government and the industry.

A notable example of this cooperation can be seen in California where, after much lobbying by the industry, the Department of Insurance recently updated regulations to allow insurers to use catastrophe modelling when setting rates

"Number three is regulatory. Today, risk is very different compared to many years ago. The regulators have to adjust their approaches in order to do this, we have to educate them. We need to engage with the regulators because the insurance market needs to be resilient,” Rahnama concluded

Moody’s new severe convective storm model

One area Moody’s has been working on is its new severe convective storms (SCS) high-definition model, which Mike Steel discussed in a recent interview with The Insurer TV.

Rahnama explained that Moody’s new HD model takes a more holistic approach to handling data, moving beyond reliance on historical precedents, which are becoming increasingly unreliable in the face of climate change.

“SCS is causing massive losses in the US, as well as recently in France and Italy. How do you really manage that? With a typical model, you can't, because you would need a million events simulated over 100,000 years.”

“To develop the new SCS model, we needed a better, more robust approach to handling hazard, vulnerability, and strong financial modelling, with data collected at a local level,” Rahnama explained.

Watch the full interview to hear more about: