Optimal Risk Selection
              Optimal Risk Selection
              Outline
              Outline
                   Use and Misuse of Cat Model
                    Use and Misuse of Cat Model
                   Optimal Risk Selection
                    Optimal Risk Selection
                   Example
                    Example
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                                                           2
                Optimal Risk Selection
                 Optimal Risk Selection
                What a Cat Model Tells Us
                 What a Cat Model Tells Us
                      Loss Probability Distribution
                        Loss Probability Distribution
                          Expected Loss
                           Expected Loss
                          Probable Maximum Loss 
                           Probable Maximum Loss 
                             (a.k.a. Value at Risk)
                             (a.k.a. Value at Risk)
                      Relative Value
                        Relative Value
                          Deal A is riskier than Deal B
                           Deal A is riskier than Deal B
                          Correlation: Constructing a Portfolio 
                           Correlation: Constructing a Portfolio 
                           with High Return on Risk Capital
                           with High Return on Risk Capital
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                                                                     3
               Optimal Risk Selection
               Optimal Risk Selection
               Great! Cat Problem Solved?
               Great! Cat Problem Solved?
                   Underwriting Decisions
                     Underwriting Decisions
                   Rate Making
                     Rate Making
                   Reinsurance Purchasing
                     Reinsurance Purchasing
                   Securitization
                     Securitization
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                                                             4
                  Optimal Risk Selection
                  Optimal Risk Selection
                  What’s Inside a Cat Model
                  What’s Inside a Cat Model
                    State-of-the-Art Science        Lack of Consensus in 
                      State-of-the-Art Science          Lack of Consensus in 
                      in Meteorology and                Scientific Community 
                      in Meteorology and                Scientific Community 
                      Seismology                        on Key Issues
                      Seismology                        on Key Issues
                    Engineering Experts’            Best Guesses Given 
                      Engineering Experts’              Best Guesses Given 
                      Opinions for Structure            Limited Data and 
                      Opinions for Structure            Limited Data and 
                      Damage                            Modeling
                      Damage                            Modeling
                    Modern Simulation               Computation Hurdles 
                      Modern Simulation                 Computation Hurdles 
                      Technology                        vs. Convergence
                      Technology                        vs. Convergence
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                                                                           5
              Optimal Risk Selection
              Optimal Risk Selection
              User’s Responsibilities
              User’s Responsibilities
                   Understand Key Assumptions
                     Understand Key Assumptions
                   Appreciate Sources of Uncertainty
                     Appreciate Sources of Uncertainty
                   Independent Model Evaluation
                     Independent Model Evaluation
                   Integrate Multiple Models
                     Integrate Multiple Models
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