Hurricane Katrina was a deadly storm that caused a large loss to the insurance industry—but not so large that it shouldn’t have been anticipated by the catastrophe models.

Executive Summary

Model misses weren't all caused by the failure to enter "floating casinos" and other specific exposures into catastrophe models, according to Karen Clark, who reports that advances in the art and science of modeling attack issues such as large loss potential outside of Florida with event estimates by location. Fine-tuned damage functions and transparent storm surge models also have developed in the wake of the storm.

In the months after this historic hurricane, there was a lot of “model-bashing” because insurers felt the models had underestimated the risk and hadn’t prepared them for this event. Detailed investigations after Hurricane Katrina revealed three significant issues with the models and model usage:

1) Overreliance on the probable maximum losses (PMLs) from the models gave a false sense of security and led insurers to miss exposure concentrations in geographical areas not driving their PMLs.

2) The storm surge models were inadequate and did not address factors such as the breaching of the levees around New Orleans.

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