Modeling for impact

Dan Hartung, head of US peril expertise, and Adam Dawson, US SCS client delivery leader, discuss the launch of Aon’s advanced cat model for US SCS risk.

What prompted the development of Aon’s new catastrophe model for the US severe convective storm (SCS) peril, and how does it add value for your clients?

Dan Hartung: SCS has been a leading concern for US insurers for several years, with losses increasing by about 9 percent annually over the past two decades. Many of these losses fall below traditional reinsurance retentions, driving greater retained volatility and pressure on earnings.

Despite the clear risk, many existing models haven’t been updated in years and don’t effectively capture recent loss patterns. Our new Impact Forecasting model addresses those challenges for greater utility in SCS modeling, helping our clients to make better business decisions and navigate potential volatility. It incorporates the most recent data to provide a more updated, representative view of SCS risk.

Why have competitor models struggled to keep pace with current SCS risk?

DH: The challenge lies in capturing important gradients in severe thunderstorm hazard across the US balanced with run-time and usability. There are many assumptions required when modeling very localized perils such as SCS, making for an intricate model-building process. As a result, many models haven’t been updated frequently enough to reflect current risk accurately.

Adam Dawson: Aon’s new model differentiates itself from other vendors in the market by integrating the most recent data to provide a current view of the risk landscape. Our focus is on improving the modeling of aggregate losses and better capturing sub-peril drivers of loss in the tail, two areas where other vendors have struggled, along with bringing clarity and confidence to the analyses.

How will the new SCS model support clients during the upcoming renewals season?

DH: By using the most up-to-date view of risk, Impact Forecasting’s SCS model delivers a valuable additional data point to help our clients more confidently quantify their risk and better align their reinsurance strategy with risk appetite. We will be able to provide loss curves from this model to reinsurers at the client’s discretion, supporting them with a present-day view of their SCS risk to aid in pricing and negotiations.

AD: Aon is also developing an industry-leading historical severe thunderstorm event catalog, powered by Impact Forecasting and planned for release in 2025. Our clients will be able to model historical events back to 2000 for their portfolio to benchmark the model’s performance against historical claims. Additionally, we will be able to recast past events on a client’s current book for a ‘what if’ view that better quantifies the impact of changes to underwriting strategy and policy terms that can be challenging to capture in an experience analysis.

How are emerging risks including climate change and urbanization being integrated into cat models, and what do they mean for (re)insurers?

AD: While climate change is a contributor, roughly 80 percent of the increases in severe thunderstorm losses are explained by socioeconomic factors. Urbanization results from people moving to more SCS-prone areas, leading to larger, denser exposure footprints. Meanwhile, the cost of construction materials and labor have increased at a faster pace than broader inflation in recent years, driving up replacement costs.

As for the remaining 20 percent of the SCS loss trend, any link to climate change is a piece of the puzzle, although it isn’t as well understood as it is for hurricanes. We're actively working with academic partners to better understand how climate change might impact severe thunderstorm activity in the US. The findings from this work will help inform a potential climate-conditioned SCS event set similar to our adjusted-rate view of hurricane risk developed in collaboration with Columbia University that allows insurers to quantify the impact of climate change on their portfolios over the next 30 years.

DH: With the majority of SCS loss increases due to exposure growth, insurers should focus on sound fundamentals and best practices to manage volatility – all of which are things they can control. Additionally, our new model is part of Aon’s broader five-step framework, which focuses on helping clients manage SCS risk across their entire business, from underwriting and pricing to innovative modeling and reinsurance strategy.