Verisk's Rob Newbold on Shaping the Future of CAT Modeling

In Episode 2 of the Building Potential series, the President of Verisk Extreme Event Solutions, Rob Newbold, joins Archipelago's Founder & Chairman, Hemant Shah, to discuss:

• Why insurance buyers are the new frontier of cat modeling
• Priorities for EES and the new capabilities for the upcoming 2024 modeling releases
• How modeling is evolving to meet the changing needs of the risk management community

Watch, listen, or read along to the full episode below:

Hemant Shah: Welcome to episode two of Building Potential, the series in which we explore new frontiers of the risk management and property insurance ecosystem.

I'm your host Hemant Shah, Founder and Chairman of Archipelago, and I'm thrilled to be joined today by Rob Newbold, the President of Verisk Extreme Event Solutions, the CAT modeling firm many of us have come to know as AIR.

Rob has been with EES for twenty-two years, and prior to him taking the reins as president at the start of this year, Rob served as EES' EVP and Chief Operating Officer.

Rob, welcome to Building Potential.

Rob Newbold: Hemant, thanks so much for having me. Absolutely thrilled to be here.

Hemant: Yeah. I've been looking forward, to this conversation for all kinds of reasons.

Rob: You know, Hemant, had you asked me ten years ago, if we would ever be in a position to have a podcast together talking about partnerships and the evolution of the modeling industry and how we're working together, I'm not sure I would have believed you. So very happy to be in the seat today.

Hemant: So, Rob, first off, heartfelt congratulations to your promotion as president of EES.

Rob: Thank you very much. Appreciate it.

Hemant: So it's just been, what, thirty days?

Rob: Just over. Yeah. Just since the start of the year.

Hemant: What's it been like, in the new role?

Rob: It's really exciting. We have a lot of really exciting things happening in the business. I will tell you it gives a whole fresh perspective through prioritization.

And, you know, you think you have a great number of things in front of you as Chief Operating Officer, and then your world immediately expands to be juggling even more things with an even broader purview. But it's a good problem to have, you know, where you have a lot of calls in the fire and to be able to partner with a really excellent global team and prioritize which ones will be the most beneficial to the market. It's a unique opportunity. I'm thrilled to be in the seat.

Hemant: Well, you're clearly bringing a wonderful combination of continuity and experience and fresh energy to this key role for the whole marketplace. I'm sure you've got some new priorities, and you're probably trying to balance the right mix between emphasizing continuity and driving change, anything you can share with us about some of the new directions you're gonna be taking the firm.

Rob: I mean, you're absolutely right. It is a unique balance to reinforce to the market the stability of our leadership team, the stability of the importance of the CAT modeling infrastructure to insurance and reinsurance globally, but also to take the opportunity to bring some fresh perspectives to really focus in on what are key priorities for the business, which I think we'll probably talk about some of them through the course of our discussion today. But we're undergoing a significant technological transformation in the business.

We have some exciting new models coming to the market, some exciting new modeling frameworks coming to market. And working together with our global team and our global client base to reinforce that we have the team that's able to get that done, and to pull the right levers and put the right teams in place to execute is really gonna be the key focus of our mission.

Hemant: Well, I look forward to unpacking some of that with you in the next half hour or so. So you alluded to this, Rob, but prior to my gig at Archipelago, you and I were – let's put it – spirited competitors.

And, in particular, I was keenly aware, back in the day, of the early work you did personally, to build AIR's CAT bond practice. And despite my best efforts as your competitor, you succeeded in establishing EES as the market leader, in that space. 

And I raised that because recently, in my new role at Archipelago, we reconnected on that very same topic when a mutual customer of ours – yours, and mine at Archipelago they're one of the largest owner-operators of commercial real estate in the world – worked with both of us to support their issuance of an indemnity CAT bond to augment their traditional insurance program.

So are you seeing more demand in issuance for CAT bonds from amongst the corporate issuers? Because, traditionally, the CAT bond market has been dominated by issuers that are reinsurers and insurers.

Is this an anomaly, or do you see this as a new frontier of application for ART?

Rob: I don't think it's an anomaly at all. I think it's the beginning of a continued evolution of a market that, as you rightly say, has been moving further up the value chain, so to speak. So I would amplify your comment that the initial CAT bond transactions were reinsurance-focused, very large index-level transactions that are fairly easy to understand.

But as the insurance market has seen the viability of that marketplace, sought indemnity protection, and naturally then the corporate market seeing that they can have success in seeking protection from this market as well. And importantly, the key part of a CAT bond transaction is the seeker of protection and the provider of protection need to agree on the viability of a risk metric that defines an expected loss that they're they're protecting. And as models have evolved, and data providers such as yourselves have stepped in to provide access to more granular information that can be used to quantify that risk, it's opened up this door for corporations to say, "Hey, actually, I can get some of this capital too, I can have success in this market by providing protection that maybe five, six years ago, they didn't think they could get just because that handshake wasn't there." The data wasn't available, and there was not an understanding that models could actually quantify that risk. So the the one we worked on together, I think will be one of many. That we see in the coming years.

Hemant: Yeah. You flag the handshake. I mean, there's it seems like there's a couple of things going on. One is, let's call the evolution of adoption from the reinsurers with the index-based transactions to the insurers now to the corporates, but you also flagged the importance of this data handshake. I'm struck by some of the innovation that's happening around the issuers at the corporate level have been perhaps a bit reluctant in the past because parametric deals, or industry-level warranty deals, have a fair amount of – or no – they perceive embedded basis risk when you're a single corporate with one particular risk profile.

How has the modeling practice evolved to be able to manage and reduce that basis risk and also unlock the indemnity transactions we're starting to see?

Rob: As models have evolved over years, and actually some things that we're really excited to be bringing to market this year will only further advance that and we can talk about it in a moment. But as more granular data has become available from the carriers and the corporates themselves, married with increased computing power, more granular data within the models, more simulations to be able to reduce that level of uncertainty across a distribution of potential loss. That availability of data, again, has increased confidence that the information being produced by the models is representative of true loss potential of the corporate risk.

Whereas, you know, maybe a decade ago, the technology just wasn't there yet, the belief to get to an individual building level view of risk. I don't think the issuer or the investor confidence would have been there to believe that a model could give a really robust view of transferable risk at the building level.

Hemant: Well, as, we watch this space, and I look forward to chatting with you, over time, I think there's a new frontier of applicability of ART to the corporate buyers of insurance, which in many ways is a, you know, very promising addressable market for innovation in this space.

One other thing that, struck me was that as we got to know each other, again, through the lens of this common customer and the work we did together, in supporting their CAT bond. Your modeling work that you performed for this owner-operator not only supported the structuring and placement of their bond, it really opened the eyes of the customer, the corporate risk manager, and their team to the power and actionable insight, a comprehensive set of CAT modeling can provide about the drivers of their risk.

In many ways, it was an opportunity for them not to sort or just a CAT bond transaction, but to get a lot of detailed insight into the underlying drivers of their portfolio risk. And it really struck me that, typically, corporate buyers' risk management teams don't currently have direct access to the models and the detailed outputs that their insurers routinely use.

Do you see this changing?

Rob: Hopefully. I believe there's utility in opening up this level of transparency and call it maybe information continuity.

And I would argue that you can draw parallels to the other side of the transaction. So we've dealt for years in the reinsurance side and the insurance side. And there's a necessary, I'm gonna use the word ‘handshake’ again. There's a necessary handshake between the insurer, their broker, and the insurer, facilitated by an unbiased independent CAT modeling point of view that allows information to be shared in a way that everyone's speaking the same language. And there's no reason why that can't move further upstream and enable that same level of dialogue and that same level of ownership and that same level of conversation to happen between corporate risk managers and their insurance brokers and their insurers.

If everybody has access to that information, arguably provides for a more productive and engaged dialogue where you're thinking proactively about terms and conditions or thinking about, "How do I potentially mitigate against a a particular peril that could be impacting my property?" It almost levels the playing field where everyone now has access to information that can make for a more productive and ultimately a better risk placement.

Hemant: Yeah. I think part of this has been motivated by, let's say, the rather challenging market conditions of the past five, six, seven years where, you know, in the past, large corporate buyers were buyers and procurers of insurance coverage, and they were largely conditioned to just accept the AALs and the PMLs provided by their broker partners to them as sufficient to understand the risk and drive the renewal strategies.

Now after, you know, years of increase, we see more retentions, we see more self-insurance, we see more captives. More of these larger entities are really looking to take a more proactive view of their risk, understand the driver of their risk, and, yes, execute an insurance transaction, but also think about how they can actually manage and mitigate the underlying risks themselves as a part of their risk management and insurance strategy.

I do think there's gonna be more opportunities for you to deliver modeling insight, you know, upstream to that frontier of the marketplace. And I'm sure you're seeing some of that in your business.

Rob: Again, I think it's a natural evolution that we've seen when we first competed way back in the day, your former firm was very focused focused on the insurance market, and we had a a deeper penetration in the reinsurance market. But, over time, each of those markets has deepened their penetration with very granular modeling. And I think there's just a natural progression again where what once moved downstream will now move upstream.

And we'll see corporations looking at ways to mitigate their risk. And I don't mean to suggest that any party in the transaction becomes less valuable, arguably everybody becomes more valuable because you have more information around which to think about pre-risk mitigation, how to structure a transaction, thinking about different ways to deploy your capital through captives or whatever it is, but it provides information in the hands of everybody in that transaction. And again, it makes for a richer dialogue.

Hemant: Well, I think it's exciting. I think, the corporate buyer community, the corporate entities that, you know, frankly, most of the world's risk is on their balance sheets, would not be insurers that reinsurers. I think that's a promising frontier.

It does suggest, you know, as one former modeler speaking to a current modeler, some new challenges that I wanna unpack with you if I can a bit.

I think it's fair to say that the first generation of CAT models were designed and optimized for analyzing large insurance portfolios, typically, in the context of a reinsurance placement decision, either as a buyer or a seller of reinsurance. 

And then the second wave of innovation delivered more granularity that enabled those models to be used by insurance underwriters, on the front end of their business to shape their portfolio, underwrite and price their programs, and so on. 

You know, now what we're talking about is this third wave of opportunity with the buyers themselves.

But as you move sort of, I always say, I guess, a downstream relatively, I always say upstream – depends on your vantage point. I'm sure that poses new challenges for how CAT models are designed, built, and delivered. Because, yes, at one level, those are very similar problems. But as you get, you know, reinsurers, insurers, to now corporate buyers.

How did the challenges as a modeler change and what do you think this means for how EES, you know, builds and delivers its models? Not to put you on the spot.

Rob: No. No. It's fine. So to put it maybe very very bluntly, it is certainly easier to validate a 20 billion dollar portfolio view of risk.

There's the consequences of uncertainty on either side of that are less dramatic than the uncertainty distribution around one building sitting in one location potentially impacted by one hail event. So, the more individuality you have, the challenge for a modeling company becomes, am I giving the right level of data and accurately quantifying the uncertainty in such a way that when I communicate a view of risk to a corporate risk manager, it's clear to them that an expected answer may be, "Why?", but there's also a distribution around that, and you need to be very clear about explaining to them. It could be nothing. It could be everything. And here's how you think about that distribution risk. So the amount of information you need to collect in a computational form and show back to the ultimate stakeholder is a little bit different for an individual risk, because the impacts of the uncertainty distribution for one building are different than across the whole portfolio of a million.

There's computational challenges that go around that. We do have excitingly an update coming out to our modeling suite this year. We've called it our next generation modeling framework. It is really, increasing points of uncertainty around our distributions of losses that enable us to provide what we believe is a more granular loss estimate for individual buildings.

It impacts our full global suite, and we're excited to roll that out to everybody here at the end of this month, actually. And that will be, the precursor to us taking the step then to the technological transformation I made.

It's an investment that we've made to – as we've seen this market moving what we would call upstream – it's an investment we think is valuable to give better quantification of risk and uncertainty for individual buildings, and we're excited to bring it out later this month.

Hemant: That totally resonates, Rob, as you move from sort of n equals industry level on this on one end of the spectrum to n equals one property on the other end of the spectrum. You know, the corporate buyers of insurance and the corporate managers of risk are closer to the n equals one end of the spectrum. Some many of them have very large portfolios that look like the size of insurance companies, but they do tend to be on one end of the spectrum versus another and you know, harnessing the computational power to generate not only the simulations, but a robust representation of the uncertainties to properly and robustly model those more granular exposures is a key part of the challenge.

And it's exciting to hear that your new release actually is well-positioned to facilitate that upstream migration.

I think you touched on something else I wanted to kind of double-click on, as it respects to moving upstream, is that you mentioned hail, and I know you were using that just as a particular example of a granular peril. But I think if it was talked to, you know, some of the corporate buyers, they feel also that the modeling needs to do a more comprehensive job, not just on the tail perils, the classic stuff, you know, you and I have been modeling for decades. But some of the body risks – the hailstorms, the severe convective storms, the wildfire, the flood. Because a lot of these corporate entities are concerned not only about just their peak exposures, but their operational resiliency and a wider range of perils is often quite relevant and important to that profile of a user, maybe more so than say a reinsurer.

Rob: Yeah. I was just thinking that, actually, as you were talking that the additional challenge in these, we'll call them 'micro perils', is that the importance of being accurate in terms of location impact becomes much harder. You have a very large hurricane swath moving through a neighborhood is very different than a wildfireor a hailstorm.

We've been investing in those perils for a number of years. We're keen to point we don't view them as secondary perils because when you're being impacted by them, they're really anything but secondary. I'll throw some stats at you just because we're on the phone.

We put out a report every year. We call it our global model losses report. Last year in 2023, we calculated a global modeled average annual loss of $133 billion, which means on average every year, the insurance industry should expect to lose $133 billion of insured loss. And what's interesting about that are two things. The largest single loss-driving peril in that 133 is US severe thunderstorm. It's just over $30 billion, which is hail, straight line wind, and tornado.

And in aggregate, flood, wildfire, and severe convective storm are about 50% of that number. So the data as modeled and as has been experienced in the last year would suggest that actually these risks are very real and the tools are out there to help quantify lost potential for a portfolio or for an individual building.

Hemant: That's a remarkable insight. Well, one is it's a testament to the work you've done that you can quantify that on a global scale across the range of perils, but a $130 billion. It wasn't that long ago when we all remarked that a $100 billion global industry loss was a significant, you know, outlier and an industry-changing aggregate year. And now, you're modeling that as the average annual insured losses.

And listeners, you may have heard it here first. You know, Rob is disavowing the term 'secondary perils'. I think it's time to put that term to bed. Some of these so-called secondary perils are the key drivers of risk, you know, not only for the insurers and reinsurers, but in particular, for those of you who are managing as risk managers, your corporate exposures – those don't feel like secondary perils to you when your distribution center, or your key facility goes down in a tornado or hailstorm. That can be a major insured loss and a disruptive event to your business.

Rob, risk managers and corporate buyers of insurance, of course, are quite familiar with the role that CAT modeling plays in their insurance placement process. But I think it's also fair to say that modeling for many, if not most, remains a bit mysterious.

What guidance do you have for them as you pursue your strategy that will make modeling more understandable, transparent, and useful for them?

Rob: I think the phrase we probably hear most often is 'black box', and my assurance to the corporate community is that they need not be. And, in fact, we've made investments over the past several years and continue to invest in opening up that box to be applicable to everyone across the value chain from individual corporate owners to insurance buyers in downstream. Models are applicable to everyone in that transaction, and it's about providing access to information and continuity of data to anybody that's involved in any sort of risk modeling activity, and that includes corporate risk managers.

Hemant: I know the risk managers will be encouraged by that development.

But another thing that I think we both see when we talk to risk managers and the corporate buyers, is they're particularly keen about vulnerability, because it's not just about a vulnerability curve to assess their risk so that it can be underwritten by an insurer. For them vulnerability is actionable.

Many of them own these properties. They operate these properties. They run their business from these properties. They have operational capacity to mitigate the risk to these properties. And they're trying to drive more resiliency into how they govern their business footprint and the property risks that inform that. And so, the vulnerability side seems like it's another opportunity to further refine the models to provide more granularity because, for this community of risk managers, it's particularly actionable because they can mitigate the risk as part of their investment strategies, not just buying insurance, but reducing risk in the first place.

Rob: The beauty of – another beauty of bringing models in house is they are obviously constructed with very diverse and robust vulnerability curves that have the capability to turn on and off different mitigating characteristics. So I'm gonna give a really bad example. But let's say I'm in a single-family home and I've turned on hurricane shutters or not. Again, not at all related to corporate risk managers, but you have the capability to test different features and see the outcome for your model of loss of what it would be. Should I invest in that mitigating feature or not? The models give you that ability to take control of that decision. So you can decide, is it worth my investment to mitigate, or should I buy insurance protection for this instead? Can I get better coverage in the market for what it would take to put this across all of my assets? Another continuous development in the model, I would say.

In particular, as these events then happen, we can validate how they're performing against actual experience, another partnership with corporations to get their actual exposure and loss data and validate post-event, how the building's performed, and continue to refine the output.

Hemant: Yeah. I think it creates a whole other dimension of risk management. So, you know, it's not just about quantifying and transferring. It ensures their levers are three. Right? They can price and underwrite, they can shape their portfolio diversification, and they can hedge their risk.

These owners, the corporate entities who are the buyers of insurance, have an additional dimension as they can mitigate the risk to the properties in the first place, which is a whole other dimension.

Rob: Yeah. They know where their buildings are. They know they know what they can do to potentially mitigate, and they have tools available to them that can help them make those assessments. It's really about giving access to information.

Hemant: Yeah. And, you know, in many ways, that's the holy grail that's motivated us all for decades. It's not about just quantifying the risk, but how do you create the actionable insight to lose risk in the first place?

You mentioned your new upcoming release, which is very exciting. You mentioned, you know, capabilities in the new next-gen financial model. What are some other priorities that you have at EES for new modeling capabilities in the coming year?

Rob: We're excited to bring again, to the notion of maybe additional perils, we have an update to our US wildfire model coming out this summer. We're really excited about it. We'll be engaging with the market here in the first quarter to try to give some indications of how that model is gonna be changing.

We continue to invest in global flood capabilities. You know, when you think about the global protection gap, flood is still a significantly uninsured or underinsured peril. We'll continue to make those investments.

We have an Italian flood model coming out in the summer, and a Middle Eastern earthquake model coming out as well. So we're continuing to look around the globe and identify opportunities to maybe go beyond those, quote, 'peak perils' and find cases where there's a protection gap and an opportunity to bring some resilient modeling capability to markets where maybe they don't currently have it.

Hemant: That's very exciting. And I think there's a real opportunity, you know, given the market dynamics, the climate dynamics, corporate governance dynamics to increasingly empower, not just insurers and reinsurers to make better decisions about managing their CAT risk, but to empower the buyers, the owners of these assets, to better, yes, transfer risk, but make better and more important form decisions to manage and mitigate their risks.

And, if I can take this opportunity to encourage you as a real leader in this community, to drive some of your prioritization towards – increasingly – towards that community because that's where the risks can be mitigated, and that community is increasingly motivated to take more proactive measures to quantify and manage the risk. Much like, you know, modeling first started with reinsurers and moved to insurers. I now think, and I know you and our fellow travelers, we see this moving upstream, into the start of the value chain, which is the owner and operator of the assets.

Rob: I'm happy to take that baton, Hemant. At Verisk we're keen to say our purpose is bringing global resilience to individuals, communities, and businesses, and that means so much more than just insurance protection. It means making the world a safer place in many different capacities, including that corporate-built environment. So happy to partner with you on that, and great things ahead for both of us, I think.

Hemant: Well, I think that's a wonderful landing place for our chat. Could not have said that mission better myself.

Kudos to you, Rob, for taking the reins as President of Verisk EES. You're gonna kick the organization to even greater heights. And, thanks for taking the baton. And, thanks for being my partner, as well, at Archipelago. We look forward to doing great things together.

Rob: Likewise. Really appreciate our talk today. Thanks, Hemant.

Hemant: Enjoyed it as well.