Linking Risk Models to Microeconomic Indicators

Catastrophe risk models are quantitative
models used to estimate probabilistic loss distributions for
a specified range of assets subject to a baseline level of
disaster risk. While cat risk models are used extensively by
the insurance and reinsurance industry to estimate expected
losses to insured assets, their ability to estimate damages
outside of a narrow range of physical assets such as
buildings or infrastructure is still limited. This paper
first provides a brief outline of cat risk models as they
currently exist, and then outlines the major econometric
issues involved in incorporating research from the growing
literature on the microeconomic impacts of disasters into a
cat model framework. Attention is specifically drawn to
issues arising from the generally low recurrence frequencies
of disasters, the likely role of difficult-to-document
indirect damages in influencing total disaster costs, and
issues related to generalizing disaster response functions
across different domains. The paper ends by noting the large
discrepancy between the current state of the literature on
disaster impacts on microeconomic indicators and the level
needed for adequate cat risk model performance, and suggests
means of closing that gap as well as potential areas for
future research.