Garry Booth recently spoke with Paul Little, president of EQECAT, about the launch of the industry-backed cat model framework Oasis. This is the full transcript of the interview
GB Is greater model transparency and flexibility required as Oasis claims?
PL It would be foolhardy to ignore the fact that Oasis has 20+ backers that say they need greater transparency. It suggests there’s room for improvement in terms of what the model vendors are providing.
My immediate thought is that despite improvements that we feel we have made in this area, cat modeling vendors must adapt to the increasing speed and depth of clients' demand for transparency. Ironically, the more they get, the more they want! That's because the level of sophistication continues to increase. High ERM standards and regulatory requirements are such that companies must understand the assumptions in the cat models, their relative strengths and shortcomings so that they are confident that the model results accurately reflect the individual risk they underwrite and the extent of portfolio risks they are taking on their balance sheet.
That being said there is a natural tension between clients' demand for greater transparency and our need to protect our intellectual property. At EQECAT we desire to have a high degree of client intimacy, in fact, we are more willing to reveal certain aspects of innovative and proprietary methodologies because we feel they are what differentiates the solutions we offer.
Oasis promises full transparency through its framework, and that is attractive. It is essentially a ‘crowd sourcing’ of modelling expertise. One question is whether or not the model components that will be available in the Oasis framework will have the same level of sophistication as that of current cat modelling companies; who have developed and refined models over the last 20 years.
Will projects like Oasis lower the cost of modelling for users?
Oasis in and of itself does not provide a full fledged cat model, for example it is important to many companies to have a user interface. You can obtain output but it is not necessarily integrated into all the appropriate work flow processes. Also, there are many components to the total cost of modelling beyond licensing fees, costs such as data warehouses, the need for analysts and administrators, and the cost of producing documentation. There is a cost associated with sustaining a consistently high quality catastrophe model. That cost is effectively being transferred to the client. This will require a significant additional investment.
Is EQECAT talking to Oasis?
Yes. We are open to new ideas. We have had a number of meetings and conversations with Oasis. It's the early days for Oasis. We are interested in observing the progress. Our view is that constructive engagement is needed to determine if a strong commercial business case will develop as they role out future versions.
A significant number of Lloyd’s entities are backing Oasis. If in the future these entities choose to access RQE via a hosted, shared platform – say Oasis v10, it makes sense for EQECAT to be part of that discussion.
At this point, however, Oasis does not present a commercial opportunity for EQECAT to engage our clients.
What's EQECAT doing to improve the flexibility of its models?
EQECAT has launched a consulting service which allows clients greater access to the assumptions we make in our models. A number of our clients have started to conduct research and collect an enormous amount of valuable data. The ideas provide a framework within which we work with clients to incorporate their unique approaches and experiences into the assumptions that are made in the modeling process.
It means the client will have a version of RQE that more closely represents their view of risk. Our near term objective is to systemize the configurability of RQE.
What’s the way ahead for cat modelling?
The catastrophe modeling industry will undergo transformative change in the next few years. A lot of the change that’s happening is being driven by advances in technology and the ability to process large amounts of data.
One of the potential benefits of initiates such as Oasis is the possibility that it might contribute to the development of a common data standard. That's exciting.
So far as EQECAT is concerned, we are thrilled to now be part of CoreLogic. With their phenomenal data assets and technological capabilities we will be able to deliver robust catastrophe models leveraging unique property-level insights and related data services to enable power risk management decisions that will power the global economy.