Improving Catastrophe Modeling for Business Interruption Insurance Needs

Abstract

While catastrophe (CAT) modeling of property damage is well developed, modeling of business interruption (BI) lags far behind. One reason is the crude nature of functional relationships in CAT models that translate property damage into BI. Another is that estimating BI losses is more complicated because it depends greatly on public and private decisions during recovery with respect to resilience tactics that dampen losses by using remaining resources more efficiently to maintain business function and to recover more quickly. This article proposes a framework for improving hazard loss estimation for BI insurance needs. Improved data collection that allows for analysis at the level of individual facilities within a company can improve matching the facilities with the effectiveness of individual forms of resilience, such as accessing inventories, relocating operations, and accelerating repair, and can therefore improve estimation accuracy. We then illustrate the difference this can make in a case study example of losses from a hurricane.