Modeling Challenges


Reinsurers and insurers use convective storm models, but they are more useful for evaluating aggregation exposure than they are for rating.


“In the Midwest we look at the quantity of events throughout tornado alley and other places that are exposed to severe convective storm.”


Erik Nikodem, Lexington Insurance


The losses of recent years illustrate that it is possible to experience high levels of frequency and severity when it comes to tornado risk. Insured tornado losses have produced an average annual loss of $6 billion over the last decade, with inflation-adjusted losses of $12 billion in 2008, $11 billion in 2003 and $10 billion in 1998. Last year, that figure was upwards of $20 billion. Whether or not this is the “new normal,” when commercial property insurance has seen historically low rates, underwriters must be concerned about how much exposure they have in places that are vulnerable to tornadoes. Tornado models can help assess aggregation exposure, but they are less useful as a pricing mechanism.


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