AIR Currents

September 20, 2016

Editor's Note: This article explains how AIR's industry exposure databases (IEDs) are developed and maintained for all modeled countries, the numerous unique advantages they provide, and why the reliability of catastrophe model results depends so heavily upon them.

Industry exposure databases (IEDs) provide a foundation for all catastrophe model loss estimates. They contain counts of all insurable properties and their respective replacement values for a given country, along with information about occupancy and the physical characteristics of the structures, such as construction type, year built, and height classifications. Even information pertaining to standard industry policy conditions, such as limits and deductibles, is incorporated into a country's IED.

Benefits of IEDs

There are numerous benefits of IEDs in catastrophe modeling. Estimates of potential insurance losses from catastrophic events (such as hurricanes, earthquakes, or terrorist attacks) are generated based on IEDs. This information can be used by insurance, reinsurance, financial, corporate, and government clients to gauge the financial impact in real time and whether they have the appropriate resources for effective emergency response.

Modeled probabilistic distributions of industry losses are also derived from IEDs based on the simulated events from the catalogs of all modeled regions and perils, as well as losses from historical events used for model validation.

Why Use IEDs?

Through CATRADER®, AIR's application for comprehensive catastrophe risk analysis using aggregate exposure data, companies can use IEDs to evaluate their loss potential. The total insured value of a company's books is compared to total industrywide exposure in an IED to calculate a company's market share, which can then be used to prorate an industry loss to determine the company's share of that loss.

Cheryl HayesCheryl Hayes
AVP, Exposures

Edited by Rachel Wisch, CCM

CATRADER industry loss estimates based on IED values can also be used to gain insight into the accuracy of modeled losses from Touchstone®, AIR's detailed, high-resolution risk management platform. Catastrophe loss estimates generated by detailed catastrophe modeling are only as good as the quality of the exposure data entered. If your market share is 1%, for example, you should expect something on the order of 1% of industry losses. A detailed analysis that indicates significantly lower or higher losses may suggest the need for further scrutiny of your company's catastrophe exposure data. Poor geocoding of risks, inaccurate replacement costs, and lack of information about occupancy and building characteristics could be contributing to inaccurate modeled estimates.

Benchmarking exposure to catastrophe risk can also be accomplished with IEDs. For example, a client may be undervaluing their exposures—exposing themselves to greater losses than their exposure assumptions would reveal—which can be determined by comparing their portfolio with IED industry data available in IED documentation or by using the Data Quality Analytics Module in Touchstone (Figure 1).

Figure 1
Figure 1. Because imported exposure data impacts results of multiple analyses, scoring and benchmarking to ensure high quality are of utmost importance.
 

In addition, building characteristics—such as construction type and height—in a company's portfolio can be validated using IEDs. Information regarding these characteristics, which play an important role in determining the vulnerability of a portfolio, is available in IED documentation.

Compiling IEDs

AIR uses a comprehensive, bottom-up approach to develop IEDs. The process begins by obtaining detailed data on risk counts, building characteristics, and construction costs from a multitude of sources. Depending on the country of interest, the information may be provided in a variety of languages; additional steps may be necessary to translate the data before it can be used. The resolution and vintage of the data can also vary by source. As a result, the task of compiling and analyzing these diverse data sets can be extremely time-consuming. The preparation of an IED requires skill and experience working with demographic data, along with a basic understanding of cost engineering and economics.

Each country presents its own challenges and it can be particularly difficult to create IEDs for developing countries. Limited access to data or poor data quality has been problematic in such regions as South America and parts of the Caribbean. Lack of current data can also be an issue; the commercial census data in some countries in Central America, for example, is more than 10 years old. In such cases, index factors are created using demographic data from additional sources and employed to project the data forward.

Updating and Validating IEDs

Once an IED is developed, it must be regularly updated to accurately reflect current values. For example, minor growth in replacement values in the U.S. can result in an increase of a few trillion dollars in total value. Updates are also particularly important in developing countries with rapidly expanding economies, where the annual change can be quite significant.

The replacement values contained in an IED are developed using a rebuild cost approach in which risk counts (number of properties), building characteristics, and costs act as the main drivers. Due to the dynamic nature of these elements, new information on each must be gathered for each update. An increase in total industry insured value of residential properties, for example, is unlikely to reflect an increase in risk counts alone; rather, adjustments in housing sizes and updated costs would likely also be contributing factors.

Validation of the replacement values contained in an IED is quite important. In contrast to the bottom-up approach that is used to develop an IED, a top-down approach is utilized for validation. Once the replacement values in an IED are derived, they are validated against client data and information on fixed assets and other economic variables.

 
 

Around the World in IEDs

The first IED developed by AIR was for the U.S. We began compiling data in 1987, and full updates are completed every two years. Residential and commercial risk counts are obtained each year from a private data provider. The current estimates of residential risk counts are based on census data, which is the primary source of residential risk information. Actual counts of commercial establishments are provided each year for commercial risks, and cost indices are used to update replacement costs. The IED for the U.S. is developed at a very high geographic resolution—up to 90-meter grid resolution—thanks to highly detailed input data, which are particularly critical in modeling perils that tend to have smaller footprints and cause more localized damage.

Figure 2
Figure 2. Modeled countries worldwide for which AIR develops and maintains IEDs. (Source: AIR)
 

Due to the time-consuming and labor-intensive nature of IED creation, full updates for countries outside of the U.S. coincide with major model updates. To ensure that modeled industry losses are kept current, AIR developed Industry Exposure Indexes that reflect changes in asset values at a country level across all business lines and is released periodically. Industry Exposure Indexes are also used when AIR issues ALERT industry loss estimates for actual events in countries for which an index has been published.

Conclusion

The value of industry exposure databases to the modeling process cannot be overemphasized, from providing the foundation for industry loss estimates to a multitude of additional applications. Thus, investment in data sets and the experts skilled at constructing IEDs for all modeled countries is a critically important attribute of any catastrophe modeling company and of primary importance at AIR.

Leveraging the Verisk Connection

The ability to leverage data from AIR's parent company, Verisk Analytics®, to augment the information in IEDs is unique to AIR and enhances the accuracy of IED values and loss estimates. In addition to data from vendors, tax assessors, censuses, and a host of other reliable sources, AIR employs cost estimating tools such as  360Value®  from ISO® in the derivation of building replacement values and data from ISO databases in the development of content and time-element splits, as well as policy conditions.

 
 

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