History of Catastrophe Modelling

Two Separate Origins

Catastrophe modelling is not rooted in one field or discipline. Its history lies at the intersection of two separate traditions: the practice of mapping insurance risk and the science of measuring natural hazards. These two threads developed independently for over a century before converging in the late 1980s to create the modern cat model.

The Insurance Mapping Tradition

In the 1800s, residential insurers managed their catastrophe risk using a remarkably simple technique: they placed tacks on wall-hung maps to indicate their concentration of exposure. This crude but effective approach helped insurers avoid over-concentrating risk in any one area. Widespread use of this mapping technique ended in the 1960s when it became too cumbersome and time-consuming to execute as portfolios grew in size and complexity.

The Natural Hazard Science Tradition

Simultaneously, scientists were developing tools to measure the physical parameters of natural hazards. The first modern seismograph — measuring earthquake ground motion — was invented in the 1800s, as were modern versions of the anemometer for measuring wind speed. By the 1970s, major studies were being published on the frequency and source of hazard events, including the U.S. Water Resources Council publication on flood hazard (1967), the Algermissen study on earthquake risk (1969), and NOAA hurricane forecasts (1972).

The Convergence: Late 1980s

These two developments — mapping risk and measuring hazard — came together definitively in the late 1980s through advances in computing power and Geographic Information Systems (GIS). GIS became an ideal environment for overlaying spatially referenced property data with hazard footprints, enabling more cost-effective and scalable hazard and loss studies than had ever been possible.

Around the same time, three major commercial modelling firms emerged:

• AIR Worldwide — founded in 1987 in Boston
• Risk Management Solutions (RMS) — formed in 1988 at Stanford University
• EQECAT — began in San Francisco in 1994 as a subsidiary of EQE International

The Catalysts: 1989 and 1992

When first introduced, cat models were not widely used by the industry. Two events in 1989 changed that — and one event in 1992 made adoption effectively mandatory.

Hurricane Hugo — September 1989

On September 21, 1989, Hurricane Hugo struck the coast of South Carolina, devastating Charleston and Myrtle Beach. Insured loss estimates totalled $4 billion. The scale of losses shocked an industry that had not properly modelled its coastal exposure.

Loma Prieta Earthquake — October 1989

Less than a month later, on October 17, 1989, the Loma Prieta Earthquake struck at the southern end of the San Francisco peninsula. Property damage to the surrounding Bay Area was estimated at $6 billion. Two major catastrophes within weeks of each other sent an unmistakable warning signal to the industry.

Hurricane Andrew — August 1992

The defining moment came in August 1992, when Hurricane Andrew made landfall in southern Florida. Within hours of landfall, AIR Worldwide issued a fax to its clients estimating that losses might reach an "astonishing" $13 billion. The final tally, issued months later, was $15.5 billion. Nine insurers became insolvent as a result of their losses from Andrew alone.

The Government Response: HAZUS

The 1989 and 1992 disasters also prompted the U.S. government to act. In 1992, the Federal Emergency Management Agency (FEMA) funded a study assessing loss estimation methodologies for earthquakes. This led to the development of HAZUS — "Hazards U.S." — a publicly available catastrophe model released in 1997. FEMA's explicit goal was to create a "standard national loss methodology for assessing losses from natural hazards." In 2004, HAZUS was expanded to include wind and flood modules, becoming HAZUS-MH (multi-hazard).

The Modern Era

By 2001, the three founding firms had been joined by other organisations developing competing models. The series of disasters in 1989 and 1992 had permanently changed the industry. Cat models grew in number, capability, and sophistication — incorporating advances in meteorology, seismology, hydrology, structural engineering, and computing. Today, no serious insurer or reinsurer writes significant natural catastrophe exposure without running it through at least one commercial cat model.