Insurance Terms Relating to Texas Windstorm Insurance Association

Catastrophe Modeling

Catastrophe modeling (also known as cat modeling) is the process of using computer-assisted calculations to estimate the losses that could be sustained by a portfolio of properties due to a catastrophic event such as a hurricane.

Insurers and risk managers use cat modeling to assess the risk in a portfolio of exposures. This might help guide an insurer's underwriting strategy or help them decide how much reinsurance to purchase. Some state departments of insurance allow insurers to use cat modeling in their rate filings to help determine how much premium their policyholders are charged in catastrophe prone areas. 

PML  - “probable maximum loss”

The term “PML” or “probable maximum loss” is one of the most widely used terms in property insurance underwriting.

The probable maximum loss for a property is that proportion of the total value of the property which will equal or exceed, in a stated proportion of all cases, the amount of loss from a specified peril or group of perils.

In the case of TWIA, PML is an accurate estimate of the total loss that can be suffered by TWIA if a major storm hits a populated section of the Texas coast.

Calculating PML accurately is critical to establish financing requirements for TWIA.The probable maximum loss under a given insurance contract is that proportion of the limit of liability which will equal or exceed, in a stated proportion of all cases, the amount of any loss covered by the contract.

Risk Assessment

Risk assessment is a step in the risk management process. Risk assessment is measuring two quantities of the risk R, the magnitude of the potential loss L, and the probability p that the loss will occur.

Risk assessment may be the most important step in the risk management process, and may also be the most difficult and prone to error. Once risks have been identified and assessed, the steps to properly deal with them are much more programmatical.

Part of the difficulty of risk management is that measurement of both of the quantities in which risk assessment is concerned can be very difficult itself. Uncertainty in the measurement is often large in both cases. Also, risk management would be simpler if a single metric could embody all of the information in the measurement. However, since two quantities are being measured, this is not possible. A risk with a large potential loss and a low probability of occurring must be treated differently than one with a low potential loss but a high likelihood of occurring. In theory both are of nearly equal priority in dealing with first, but in practice it can be very difficult to manage when faced with the scarcity of resources, especially time, in which to conduct the risk management process.

Individual risk assessment of TWIA is important for accurate pricing and the overall financing of TWIA.