Non-modeled perils

Non-modeled perils are the catastrophe loss sources that no model in the portfolio covers, and which are therefore missing from the average annual loss (AAL), the PMLs and the whole loss table. Thailand, fall 2011: the Chao Phraya flood swamped the industrial estates around Ayutthaya and Bangkok. The major vendors had no flood model for the country. The insured bill went past 10 billion dollars, and a large share landed on the Japanese insurers of manufacturers with plants there. The term covers three different things. Whole perils with no model in a region: flood in several Asian countries, wildfire outside the markets where it has been built, hail in many places. Sub-perils of a modeled peril, such as the Christchurch liquefaction in 2011, which earthquake models of the time handled poorly. And loss components: contingent business interruption, claims handling expenses, post-event cost inflation when that option is switched off. The market handles them with loads. A percentage goes on top of the modeled AAL, a deterministic scenario serves as a floor, or the cedent's claims experience serves as the benchmark. Lloyd's asks syndicates to document these loads in their capital model. They do not show up in the ELT handed to the reinsurer, which has to rebuild them to compare like with like. A practitioner's caveat: the load is set by expert judgment, then negotiated. In a soft market it shrinks from one renewal to the next with no change in the risk, and that is often where a program's underpricing hides.