folks in that situation doing and is it the right thing to do? Is it enough?
GODHWANI: First of all, a lot of things that Brian said are concerning compared to where the market is and how people are making buying decisions. In the end, people are buying where they perceive there to be risk. In urban centers like New York and DC and Chicago, an average buyer will buy limit, buy terrorism cover. It’s available and they’ll pay the price for it. The issue is in areas like Des Moines and other cities where there’s less of a perceived risk, as Brian relates. People will make decisions not to buy terrorism there. The take-up rate is much less in those sorts of towns. It’s interesting because the actual price is much less in those areas but they’ll decide to pass on the price.
The other issue talks about WMDs, radiological, chemical, biological, nuclear events. Those events aren’t actually covered in a typical terrorism policy. In the end you can buy the cover but you have to go to places like Lexington and other companies that are nonadmitted to find that coverage. People are making decisions not to look for those add-on covers. They’re buying their typical terrorism policy.
An other issue is the emotional impact of a terrorism event. The issue is when a hurricane event impacts the coast in a way we sort, we expect it. Not necessarily the magnitude of it but we’re prepared for it.
If you look at after ’01 and you look at after ’04 and ’05 you’ll see very different reactions by insurance companies. After ’01, even though the events in magnitude insured dollars were less, insurance companies reacted much harsher than they did after ’04 and ’05 in pricing, coverage and so forth. So the unexpected makes people react differently. They have to step back and look at their own operations and make decisions about, am I prepared? Have I thought about all the different scenarios? Those are the things I think in terrorism people are under-estimating, the exposure. People are making decisions about perceived risk as opposed to the risk could be anywhere.
McDONALD: Brian, you talk with companies and look at how people are reacting to the possibility of terrorism. What are you seeing in the business setting?
FINLAY: It’s interesting. There is a continuum as we get further and further away from 9-11. To Sanjay’s point, we see less and less interest in the media, in the public space in general, for the potential for a true terrorist incident. Unfortunately, that is not what we’re seeing in terms of technological flows as well as recent incidents involving not only terrorist attacks but also information that has flowed through intelligence agencies. As we speak, the United States government and other intelligence agencies are acting on recent information that another attack, again emanating from the Al Qaeda franchise operating out of Yemen may be in the works. We don’t know where the attack is coming. We don’t know what the attack will be.
Until there is a significant event, we tend to sort of think the potential is down the road and it couldn’t possibly occur here in Des Moines. Unfortunately, we’re seeing less and less interest across the board in being truly prepared for an incident like this.
McDONALD: Thank you, Brian, for making my weekend. Marilyn, why don’t you start us off with a question from one of the attendees?
OSTERMILLER: Yes. Someone found your remarks thought-provoking, Roger, and would like to know what you folks feel about the reinsurance industry’s widespread reliance on cat modeling, given Roger’s comments? Sanjay, do you have a thought?
GODHWANI: The response on this is it’s not just the reinsurance industry. The insurance industry and even buyers make decisions off of modeling. There is good data information that comes out of modeling. It just can’t be the basis of your full decision. If I look at it from our standpoint, you shouldn’t just look at the modeled result. What’s your overall PML? We like to look at volatility around the loss. You should also think about what total limit you have exposed.
You have to look at it from different angles, not only modeled angles but underwriting angles, the limits exposed and so forth. I would beg to say that companies are trying to look at other avenues outside of just modeled results. That’s a sense of awareness that came out of the last year and a half and the events of ’04 and ’05, that you can’t rely on a single mechanism to try to decide what your full exposure is.
McDONALD: I’d like to hear actually all three guests on that same question. What’s your take on the modeling industry. Not to bash modelers – God knows, there are people waiting to do that – but what they’re doing and how it’s being used and how it’s being perceived. Roger?
PIELKE: Yes, models are actually extremely useful. You can make a pretty convincing argument that the industry wouldn’t exist in its present form without the existence of the models. That being said, it’s less about the models being good and bad than how we use them when we make decisions. What models do is they tell us how very complicated interactions among various assumptions turn out. These interactions are so complicated that we need models to figure it out. We shouldn’t lose sight of those assumptions that we put into the model. If we assume something a little bit different, how things might turn out.
Another thing to realize about models is they’re not predictive tools. They tell us something again about our assumptions. If people are using models to predict what sort of losses they might experience next year or in the next five years, they’re probably misusing models. So the issues involving models have much more to do on the user end than necessarily on the modeling end. It’s the appropriate use that I would really emphasize.
McDONALD: Laurie, my first exposure to models was quite a long time ago, an earthquake model that I had seen. What’s your take on how they’ve been developed and particularly how they’re being used? Do you think it’s as valuable a tool as people are using them?
JOHNSON: I worked at Risk Management Solutions for eight years and lead communication on the science behind the modeling. So I’m used to being bashed. I’m also very passionate about modeling. In my career lifespan I’ve seen technology