AIR & RenRe collaborate on probabilistic casualty risk model

AIR Worldwide and Bermudian reinsurance firm RenaissanceRe are collaborating on the development of what they call the industry’s first probabilistic casualty catastrophe risk model, which the pair say will enhance the industry’s modeling of long-tail casualty risk.

AIR’s parent Verisk Analytics announced the acquisition of Arium, an independent company focused on liability risk modeling and decision support, just over one year ago. Now the Arium software tools are getting put to good use in the development of the first probabilistic casualty risk model.

AIR is producing portfolio-specific casualty losses based on the Arium exposure management application, using its scenario-based loss assessment framework to measure portfolio loss potential and exposures to simulated scenarios for both emerging risks and forward-projected historical events.

AIR and reinsurance firm RenaissanceRe will continue to work together to further refine the fully probabilistic model for extreme liability events, the pair said today.

“Since our inception, RenaissanceRe has been at the forefront of applying science, engineering, and data to inform our independent view of risk,” explained Ian Branagan, senior vice president and group chief risk officer at RenaissanceRe. “Incorporating third-party expertise from proven leaders such as AIR wherever appropriate is a key part of this process. We’re pleased to work with AIR to advance our industry’s ability to better understand how to model and manage casualty and specialty risk.”

“We’re currently developing the industry’s most comprehensive model of liability risk to help companies understand the complex interconnections in their portfolios, resulting in a comprehensive assessment of potential future losses,” added Dr. Jay Guin, chief research officer at AIR Worldwide. “Collaborating with a global leader in risk management like RenaissanceRe is a great step forward in the development of our stochastic model. This model provides a forward-looking view of risk and will enable insurers and reinsurers to capture the full distribution of the frequency and severity of casualty catastrophes.”

“Arium is a powerful exposure management application designed to help companies evaluate liability accumulations and run casualty risk scenarios,” Robin Wilkinson, vice president and managing director of casualty analytics at AIR Worldwide also said. “With Arium, insurers can analyze and quantify their exposure to simulated liability events and become more informed on what types of future events could cause significant losses to their portfolios. As Arium continues to evolve, the stochastic model will enable companies to understand and manage their casualty risk more thoroughly.”

As the industry’s ability to analyse and measure casualty and liability tail-risks improves the chances of more casualty reinsurance risks ending up in insurance-linked securities (ILS) portfolios also increases.

Efforts such as these will also make it easier for insurance and reinsurance companies to improve the performance of their liability portfolios, benefiting their shareholders but also making casualty coverage more accessible and likely more affordable in the long-run.

Casualty risks have already shown some promise for the insurance-linked securities (ILS) space, as evidenced by the recent Horse Capital I DAC, motor third-party liability ILS transaction and also private casualty linked securities transactions that MultiStrat has completed of late.

Robust casualty risk models will make it possible for the ILS fund manager community to incorporate more liability exposures into their portfolios in years to come.

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