Australian insurers’ demand for catastrophe models will increase as companies try to gain a competitive edge in the shift to risk-based pricing, reinsurance broker Aon Benfield says.

Head of Analytics for Australia and New Zealand Peter Cheesman told insuranceNEWS.com.au modelling has evolved rapidly.

“Over the space of 15 or so years, it has become one of the main tools a reinsurance broker uses to assist clients,” he said.

Modelling helps assess risk levels where there is insufficient historical data.

“With something like car insurance, it is easy,” Mr Cheesman said. “Accidents happen every day and there is a huge amount of data. Insurers can accurately predict what will happen.

“But with a catastrophic event such as an earthquake in Australia, there are only one or two data points and that is not enough to predict what could happen if, for example, a quake hit Melbourne or Sydney.”

Catastrophe models create a “pseudo-historic event set” that generates information to help clients set premium levels and reinsurance limits.

“We have a new flood model with 10,000 years of simulated rainfall events,” Mr Cheesman said. “Companies rely heavily on these models now and demand will only grow as they try to gain a competitive advantage.

“There will be greater demand for accuracy and tools will become more and more sophisticated as more scientific information becomes available.”

Growing use of modelling will enable insurers to move from community-based pricing to risk-based pricing, Mr Cheesman says.

“Large data sets allow insurers to price risks more accurately,” he said.