Financial module (catastrophe model)

The financial module is the part of a catastrophe model that applies contract terms to the physical loss computed upstream. It starts from the ground-up loss, takes off deductibles, caps at policy limits and sublimits, then runs the reinsurance treaties to go from gross to net. It works in tiers: site, policy, account, program. A per-site deductible and a per-policy deductible do not produce the same loss, and the module only sees what the exposure file tells it. In Florida, homeowners policies often carry a hurricane deductible set as a percentage of the dwelling's insured value; California earthquake cover works the same way. On a large event, those percentage deductibles weigh far more than a flat amount. The technical point is secondary uncertainty. The vulnerability module delivers a distribution of damage ratios around a mean. Applying a deductible to the mean alone understates the loss whenever the tail of the distribution crosses the deductible. Vendor models therefore apply terms to the full distribution, which makes the net loss sensitive to the uncertainty assumption chosen. Downstream, the event loss table (ELT) and the year loss table (YLT) carry all three levels; excess of loss treaties, reinstatements and aggregate features are computed on the YLT. A practitioner's caveat: a good share of the gaps between a cedent's modeling and its reinsurer's start here, with coding. A flood sublimit left out, a deductible entered as an amount instead of a percentage, and the net loss doubles with no change in hazard.