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Catastrophe Clarity

Companies to Watch - March 2012

Company: Karen Clark & Co.

President: Karen Clark

Year Founded: 2007

# of Employees: 14

Public or Private: Private

Annual revenue: Undisclosed

Beginnings

Karen Clark & Co. (KCC) president Karen Clark has intimate knowledge of the inner workings of catastrophe (CAT) models, having previously founded AIR Worldwide, a provider of risk modeling software. However, she realized that many insurers were relying too heavily on the Probable Maximum Loss (PML), which is just one number on the Exceedance Probability (EP) curve that a model outputs, when making important risk management decisions. Clark states this was a concern because models are based on many assumptions.

“There’s an enormous amount of uncertainty around the output of the models, particularly the PMLs, and companies were starting to treat these numbers as if they are accurate instead of very rough estimates,” she says.

Clark and her business partner, Vivek Basrur, established consulting firm KCC to help insurers, brokers and reinsurers better understand CAT models and evaluate risk. Because different models can output very different PML numbers, KCC helps companies determine which models are most credible for their books of business.

“We have very unique expertise in how to evaluate the model output, and because we’re not attached to any modeling company we can give that advice independently and provide unbiased information,” says Clark.

Reason to Watch

Models are highly volatile because there is little or no data to support them and calculations are not transparent to users, according to Clark. In January 2012, KCC launched Characteristic Events (CE) using the same scientific data that underlies the model. CE takes every region in the US and creates a typical 100, 250 and 500-year event.

“The CE is representative of the selected return period for each region and then actually floated across a company’s book of business,” explains Clark. “For example, in Texas there are over 30 [hurricane] landfall points, and you get a range of loss estimates for the 100-year CE, whereas with a model you just get one number—the PML.”

Clark states another frustrating issue with models is that every time they’re updated with a new set of events, the company’s PML changes making it difficult to manage risk. In comparison, CEs are stable and provide business owners with consistent information about the types and sizes of losses.

The tool is currently able to provide information about US hurricanes. KCC aims to expand the CE approach to other perils including Canadian and US earthquakes and severe thunderstorms by year-end 2012.

“We have very unique expertise in how to evaluate the model output, and because we’re not attached to any modeling company we can give that advice independently and provide unbiased information.”

Recent Triumphs

Clark says KCC is proud to have been embraced by the industry as an unbiased, independent expert. Companies are very open with us, she says, sharing their concerns and challenges so we’ve learned a lot over the past several years.

Challenges

KCC has an ongoing challenge of developing tools that tackle the issues businesses face in managing CAT risk.

In Clark’s experience, there are three main challenges that all companies face, whether small, large, Canadian or international. First, companies need more stable and better risk metrics aside from PMLs. Second, because models are black boxes that you can’t see inside, companies spend enormous amounts of time and resources trying to understand the model output, so they want transparency. Third, models are generally one size fits all, so all types of companies are using the same model, she says.

“Companies don’t have other tools to help because the model has been the only tool in town,” Clark explains. “Our challenge at KCC is figuring out how we can develop scientific tools that companies can use confidently, which provide more consistent information, transparency and flexibility.”

New Initiatives

Additionally, the firm is working on a software tool that will allow Canadian and US companies to licence the CE methodology for a lower cost than to licence a cat model.

Charitable Causes

Habitat for Humanity

Headquarters

10 St. James Avenue,
 Boston, MA, 02116, USA

617.423.2800

www.karenclarkandco.com

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Copyright 2012 Rogers Publishing Ltd. This article first appeared in the March 2012 edition of Canadian Insurance Top Broker magazine.

Transcontinental Media G.P.