Launched at the Monte Carlo Rendezvous in 2011, the Oasis Loss Modelling Framework is a not-for-profit company supported by Lloyd’s and funded by a community of well-known re/insurers and brokers in the UK, Bermuda, Zurich and the US. Its ambition aim is to deliver a new method of catastrophe modelling to the industry in 2013. Aside from being not-for-profit and open source, Oasis does a few things differently. Its plug and play model makes it easy for new entrants to come into the market. By providing access to the simulation kernel and financial module for free (the part of the model that computes financial losses by applying insurance terms and conditions) Oasis allows new players to share their models and views of risk to the market.
A number of enterprises from across the globe have already joined as associate members, many of them familiar names including the UK Met Office, University College London, Karen Clark & Co, JBA Risk Management and Perils AG. The European Union funded Climate-KIC programme is backing the initiative and has sponsored numerous model developers.
The aim is not just to support a new modelling community but to also help the existing one too. “We hope that the work we are doing with our members will help the existing modelling firms in developing their own approaches, ” says Trevor Maynard, head of exposure management and reinsurance at Lloyd’s and director of Oasis. “For example, we encourage model developers to work with other emerging platforms.”
A need for change
Insurance and reinsurance companies are under growing pressure to demonstrate that they fully understand the output of the models they consult. This is a key requirement of the “use test” in Solvency II, Europe’s new regulatory framework for the industry. However, for many users the models remain opaque “black boxes” which are difficult to penetrate.
Major events – including catastrophes in 2011 and 2012 such as earthquakes in New Zealand, Japan Earthquake and Tsunami and Hurricane Sandy in East Coast US – continue to demonstrate the levels of uncertainty that can exist in model results.
New releases of catastrophe models have had a sudden impact on portfolios of risk, increasing exposures due to a change in understanding of how hazards behave, such as whether hurricanes take longer than previously thought to dissipate as they move inland.
“The issues of model uncertainty and change pose many difficult challenges for the industry, ” states reinsurance broker, Guy Carpenter. “The ‘black box’ should no longer be left to make the decisions. Rather it should be considered a tool to help inform the decisions made by (human) professionals.” A band of uncertainty exists around the output of any cat model, typically illustrated as a probable maximum loss (PML), explains the reinsurance broker. It argues this “uncertainty band” paints a more realistic – albeit less precise – picture of cat risk. Oasis market research discovered an increasing desire among re/insurance companies to generate their own view of risk. Better understanding of the sensitivity of cat models and their inherent uncertainty are likely to be key elements to achieving this.
The Oasis initiative
The Oasis Loss Modelling Framework is positioning itself as a new method of cat modelling. It will allow model users to undertake full uncertainty calculations within a given model combination and to test a variety of models to illustrate the sensitivity of results from each model.
“The Met Office knows a lot about European windstorms among other things, but not necessarily a lot about insurance conditions and terms” says Dickie Whitaker, project director of Oasis. “Since Oasis is giving away the simulation kernel and financial module it doesn’t have to know about these. The Met office is now building a European windstorm model that it will license to the industry.” “By building a community and defining modelling standards we are stimulating innovation supported by a viable commercial environment, ” he adds. “Vulnerability and hazard specialists are joining Oasis along with exposure, run time, visualisation, and satellite specialists.”
All of this is helped by a new design of the software architecture led by technical director Dr Peter Taylor. “With new techniques and technology we are able to get orders of magnitude run time improvements over conventional approaches, ” explains Taylor. “This allows us to undertake analyses not previously thought possible very quickly. We can also do these calculations securely over the internet thanks to Oasis’s ‘sparse data’ design.”
The Oasis team is working to a tight schedule. Members will have access to four proof-of-concept models from this summer for European windstorm, UK flood, North African quake and West Coast US and Canada tsunami scenarios. While this is a lot to achieve in a short period of time the Oasis team believes its flexible approach will broaden the market, bringing catastrophe modelling analytics to smaller insurance companies, the corporate risk buyer, government and even, potentially to the general public.
Find out more at the Oasis website: http://www.oasislmf.org
(source: Lloyd’s of London)