Catastrophe modeling tools and their application to legal risks

For decades, insurers have been refining what is known as “cat modeling,” gathering and analyzing date to estimate insured losses caused by large-scale natural calamities. Such predictions allow insurers to better set premiums, devise exclusions, arrange interventions, and quantify the indemnity portion of their risk profile (Best’s Rev., Nov. 2005 at 81).

The short article cautiously praised the evolution of these tools, which raised for me the question of applying them to understanding better the consequences of major litigation. Losses or risks of losses in some law suits amount to catastrophes.

It wisely points out some limitations of the tools, such as the need to feed in accurate information, to season the output with common sense and experience, and to fathom the basic dynamics of the model, but it strikes a positive note about the applicability of these modeling tools to major risks. (See my post of Nov. 15, 2005 about Altria’s definition of major litigation.)