Thursday, September 25, 2014

Guest Post at Artemis

I have a guest post on the Artemis blog.  The blog and its associated website is a really amazing source for information on insurance linked securities, particularly cat bonds.  I've found it useful in my research and improving my understanding of the risk sharing and trading enterprise.  

The piece is about model risk. Despite grand efforts to help risk managers feel better about the uncertainty in their models, the risk that model is just wrong remains persistent.
In response to client demand, catastrophe modelers are offering improved access to model components and ease of model blending, morphing, fusing, etc. Most notable of efforts are those of RMS, Karen Clark and Company (KCC) and Lloyd’s. RMS(one) promises to provide users with access to over 300 probabilistic models, whereas KCC’s RiskInsight enables users access to internal assumptions. Lloyd’s Oasis offers users choice in “a set of plug-and-play components.”

These efforts are aimed at resolving concerns about model risk but do not actually help to reduce or control model risk. Improved ability to manipulate vendors’ models may buffer companies from volatility produced by model updates. But that volatility is produced by changes in the decision making by the model vendors and their judgments about how best to create a model.

The ability to create one’s own theory on how best to estimate a given risk does not make that theory an accurate representation of reality. 
The rest of the piece is here.

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