ADAM PODLAHA & ALEXANDER ALABASTER, AON
Addressing uncertainty: Aon’s mission to evolve catastrophe modelling
The science behind loss forecasting is developing and evolving faster than ever—but at its heart is how to measure and manage uncertainty.
The more models and inputs the better—for any peril. That is the ethos of Adam Podlaha, head of Impact Forecasting at Aon, discussing the work his team has been doing around loss forecasting for various perils globally. The Aon unit is looking to offer credible alternative views for the major territories, including the US, Europe, and Japan, while exploring the potential in emerging markets.
“A common misconception when it comes to risk models and loss forecasting is that one number is better than many numbers,” Podlaha says. “That is because people don’t like uncertainty. I would say the contrary—for me, uncertainty is my passion.
“If you want to be certain about the weather forecast, you won’t check just one, you will check many. That is what Impact Forecasting does.”
He stresses that, for some events, the uncertainty—the variation between models—reduces over time. Many days before a hurricane makes landfall, for example, this variation will be greater. As it gets closer to landfall, it reduces.
Podlaha explains that only by understanding uncertainty and being open to using a greater number of inputs, will our skill in loss forecasting improve.
“Only by measuring it can you start to increase your understanding, leading to more informed decisions,” he says. “Let’s say you use 11 models: the spread between the maximum and the minimum is in fact the measure of the uncertainty which, if mixed with experience, delivers the desired output.
“It is better to include as many credible models as possible.”
Adam Podlaha, Aon
“If you have only three models, the uncertainty may be narrower but it’s simply less complete information.
“But that doesn’t mean you quantified it better. It just means that you are unaware what’s happening. It is better to include as many credible models as possible and then visualise the uncertainty, applying judgement.”
That is why, Podlaha says, his team seeks to utilise as many models as possible in its analysis of risk.
A new climate for modelling
Podlaha and Alexander Alabaster, Aon’s head of Catastrophe Research, UK & EMEA, have been part of the firm’s united efforts to ensure that industry catastrophe models are starting to reflect the potential impacts of climate change.
Alabaster says that Aon’s global academic collaborations and deep understanding of the models are helping with the development of forward-looking “Views of Risk” for clients, that incorporate climate change considerations.
“In terms of climate change, there is much discussion over the evolution of major perils and how we address these dynamics, but we also need to be thinking about how we create solutions for peril regions that are not material now, but may become material in the future.
“The climate has already started to change the dynamics of some perils.”
Alexander Alabaster, Aon
“There is evidence that the climate has already started to change the dynamics of some perils, and it is vital that the models account for this trend in hazard when estimating the losses for the current period and as we consider further into the future.”
Alabaster leads a dedicated team of nearly 40 research analysts who advise re/insurers on how they can create a custom View of Risk to manage their portfolio, navigate volatility, transfer risk, and optimise capital. He says that Aon’s academic collaborations and own research have already helped it to better understand how the frequency and severity of certain perils will change, particularly in areas such as river flows, cyclone, multi-peril interactions, and European windstorm clustering. But further work needs to be done.
“As an industry, we need to invest in the development of better insights to manage the change in hazard, and additionally, not ignore how changes in exposure and mitigation will play out and interact to change our View of Risk.
“In so doing, we will reduce the uncertainty that has been introduced through climate change, to enable capital to be confidently deployed by the industry.”
Adam Podlaha is head of Impact Forecasting at Aon. He can be contacted at: adam.podlaha@aon.com
Alexander Alabaster is Aon’s head of Catastrophe Research, UK & EMEA. He can be contacted at: alexander.alabaster@aon.com
Main image: Shutterstock / Dudarev Mikhail
