What is a Catastrophe Model?
A computer simulation framework that models hazard, vulnerability, exposure, and financial loss from natural disasters.
Catastrophe Model
A computer simulation framework that models hazard, vulnerability, exposure, and financial loss from natural disasters.
How it works in practice
Before pricing a cat bond covering US hurricane risk, the structuring agent runs the deal through a catastrophe model. The model simulates tens of thousands of synthetic hurricane seasons, estimating wind speeds, storm surge, and rainfall for each event. It then applies vulnerability functions to the insurer's exposure data to estimate losses at each return period. The output is a loss exceedance curve used to set the bond's expected loss and coupon.
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