Catastrophe Modeling with Financial Applications

Catastrophe modeling is used to prepare for losses caused by natural catastrophes such as earthquakes, hurricanes, or tornadoes and man-made catastrophes such as terrorism. Modeled data can be used to create a comprehensive distribution of possible disasters. The distribution gives probabilities of potential catastrophes of different severities occurring over a certain time frame. Calculating potential losses and probability of those losses occurring allows insurance companies to plan and reserve enough money to protect themselves from catastrophic events. Using a catastrophe case study posted online from the Casualty Actuarial Society and R software, this paper shows the use of statistical techniques to create an Exceedance Probability plot for possible losses from a set of hurricanes with varying loss severity (CAS 18). The creation of the probability plot will then be used on a set of data called “SP500_2000to2015_SM” to show how the use of catastrophe modeling can apply to financial data