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10-21-05
By Jeanne Silsby, 541-737-6020
SOURCE: Ping-Hung Hsieh, 541-737-4297
CORVALLIS, Ore. - Before Hurricane Katrina finished its wrath, Oregon State University's Ping-Hung Hsieh had a good idea of the magnitude of insurance property losses that would be incurred. According to Hsieh's statistical model for forecasting property losses caused by catastrophic events, Katrina is predicted to cost about $60 billion in normalized dollars.
"Extreme value modeling is one of the important tools for insurance companies to plan for unforeseen natural disasters," said Hsieh, a College of Business associate professor of quantitative methods. "Predicting future record losses is helpful in determining if customer premiums and other company reserves are enough to ensure adequate company financial protection in the time of a major disaster."
In creating his model, Hsieh leveraged data from the 10 most costly property loss events in the United States between 1990 and 1999, including Hurricane Andrew, the biggest California earthquake, the largest tornado, the most destructive California fire, Hurricane Fran and the worst freeze.
Because catastrophic events occur infrequently and conditions change over time, his model also considers population growth, personal wealth and inflation. "As population grows, more people are exposed to catastrophic risk, and more people may reside in vulnerable locations," said Hsieh.
Changes in land use, construction techniques and building codes also have an impact with regard to hurricane or earthquake losses. "The model helps property/casualty insurance companies plan strategically and manage their risk," Hsieh said.
Hsieh has applied his mathematical model to natural catastrophes in the United States that have caused more than $25 million in direct insured losses to property. The model, however, can be applied to any region worldwide.
His data-analytic method employs expert knowledge and accounts for uncertainty in parameter estimation. Hsieh includes data from the Insurance Services Office and the Swiss Re in his model.
Hsieh's "Data-Analytic Method for Forecasting Next Record Catastrophe Loss" was published in The Journal of Risk and Insurance, 2004, Vol. 71, no. 2, 309-322. For more information, see http://www.bus.oregonstate.edu/faculty/bio.htm?UserName=Hsiehph.
About the OSU College of Business: The College of Business educates students for success in managing and developing sustainable enterprises. With strong graduate and undergraduate programs, the Austin Entrepreneurship Program, the Austin Family Business Program and an emphasis on experiential learning, the college helps students and businesses succeed. For more information on the OSU College of Business, see http://www.bus.oregonstate.edu/.