According to executives at the World Bank, artificial intelligence (AI) based improvements to catastrophe risk modelling could in future allow more transactions to be brought to the catastrophe bond market, with less lead time and potentially wider investor acceptance.
In a joint report on the matter, the World Bank’s Michael Bennett, Head of Market Solutions and Structured Finance, and Akinchan (Aki) Jain, Head of Asset & Liability Operations, observed that the lack of robust modelling of risks in many developing countries is one of the factors that limit its ability to offer cat bond natural disaster coverage to more of its member governments.
However, as per the report, AI has the potential to alleviate this limitation by “shortening the time required to develop new models and improving modelling reliability.”
A key benefit of applying AI to catastrophe risk modelling, highlighted in the report, is its ability to efficiently analyse and integrate vast amounts of data from diverse sources — such as satellite images, ground detection devices, and historical records — potentially uncovering patterns and correlations that traditional modelling techniques may overlook.
Meanwhile, artificial intelligence technology could reportedly improve the understanding of vulnerabilities and potential economic losses from events, by analysing construction data at a highly granular level (e.g., specific construction materials and methods used, building by building).
The World Bank executives additionally observed that AI provides the potential to continuously improve models in real time based on the latest available data.
“Providing market players greater confidence in model outputs, particularly with respect to events like hurricanes, floods and droughts for which the frequency and severity are impacted by climate change,” they said.
The executives concluded, “These type of AI-based improvements to catastrophe risk modelling should allow the World Bank to bring more transactions to the cat bond market, and with less lead time and wider investor acceptance.”
The World Bank has already facilitated more than US $4.8 billion in cat bonds across 17 transactions according to Artemis Deal Directory data.
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