Eye of the Storm

But primary insurers employ their own ranks of sophisticated actuarial and financial experts. To earn their keep, brokers must bring something more to the equation and provide services that primary insurers value.

At Benfield, the latest such offering is a new version, released in October 2007, of Exposure View, a proprietary software application that further analyzes data from commercially available cat models and lets insurance-company clients visualize more easily what those models are telling them. Benfield built the application in 2003, when a client wished out loud for a way to see his company’s disaster exposure, instead of just the monetary data that commercial cat models provide.

On a computer screen in Benfield’s offices, Doug Olson, the company’s assistant vice president for product development and applied research, calls up an Exposure View map of the United States with red dots showing one unidentified client’s insured locations—more than 300,000 of them. Then Olson zooms in to roughly a square-mile area next to Lake Harriet in Minneapolis. If he likes, the map, now showing a dozen or so red dots, can be replaced by a satellite image showing the actual houses, or a particular house. He can pull up policy data on those individual properties—coverage limits, whether the building is made of wood or brick. He also can call up the insurance company’s total dollar exposure within a defined area on the map.

Hedge funds have been particularly active in buying catastrophe risk.

So suppose a tornado rampages through this neighborhood. Olson superimposes an irregular shape showing a theoretical path of destruction. Up pops the insurance company’s maximum loss if every covered property in that path is demolished. What if the damage amounts to only 50 percent of the maximum loss? The program can calculate that, too.

How about a coastal area in Louisiana or Florida? If a hurricane blows through the insured properties in Circle A at 170 mph and through those in adjacent Circle B at only 100 mph, here is what the likely loss would be.

Exposure View is gee-whiz stuff, but Karon says another application—Dynamic Portfolio Optimization—is an even better example of how a brokerage like Benfield can bring value to its insurance company clients. While a commercial cat model will examine a whole portfolio of business and what its risk exposure is, DPO will “slice and dice” the portfolio, Karon says, and let insurers see their risk on a per-policy basis—how much risk each policy is contributing to overall risk. Then they can set premiums based on the specific risk of each policy—or choose not to write a policy.