The U.S. saw more than 17,500 severe weather events in 2021,1 while Canada suffered record floods, heat waves, wildfires and drought.2
The frequency and severity of weather events is having a profound effect on real estate owners and operators, many of whom have never had to cope with severe weather events that damage property or shut down operations.
These conditions have turned catastrophe (CAT) modeling into an essential tool for the real estate industry. Using location, historical and property data, CAT modeling calculates the risk of a weather or natural disaster for a given geography, as well as the possible severity of an event.
Insurance carriers have used CAT modeling for decades, but with the severity of weather events today, it’s making its way into the real estate business.
While not a crystal ball, CAT modeling offers real estate owners and operators a window into disaster planning and finding the right amount of property coverage.
How CAT modeling works
Catastrophe modeling evaluates several perils — earthquake, flood, hurricane, wildfire, winter storm, severe storm and flood — that are likely to happen within a specific geography (e.g., real estate in the mountains won’t benefit from flood modeling as would a coastal area).
Along with geographic location, CAT modeling relies on property data. This includes soil samples and building statistics such as construction date, square footage, occupancy type and sprinkler information.
With this data, CAT modeling can predict the severity and frequency of events—and what that means for a real estate owner. For instance, it can estimate the probable maximum loss (PML) of a Level 1 tornado or category 3 hurricane in a specific geography.
Likewise, CAT modeling takes existing data on the frequency of catastrophic events in a given area and extends it across the entire geographic spread of insurable properties. This gives insight into determining the right level of coverage for a given type of weather event for a specific location or an entire real estate portfolio.
Protection from being under- or over-insured
As noted above, insurers and risk managers have long used CAT modeling to determine accurate risk management strategies. It’s a crucial tool in their underwriting process.
Real estate operations should invest in CAT modeling for the same reason: CAT modeling and PML studies can provide owners and operators with insight to improve decision making. An insurance broker armed with a CAT modeling report can provide evidence that coverage pricing may be misaligned with an insured’s actual risk.
And that leads to the issue of buying CAT modeling services: The cost of being under- or over-insured is greater than the cost of predictive CAT modeling. A $15 million policy can’t adequately cover $30 million in risk, but a real estate owner or investor can’t know that without CAT modeling and PML studies.
While saving premium with the $15 million policy, one catastrophic event could leave a real estate owner with an unrecoverable loss.
Contact HUB International’s real estate experts for more information on CAT modeling for your portfolio.
1 NOAA “Annual Severe Weather Report Summary 2021,” December 20, 2021.
2 Government of Canada, “Canada’s top 10 weather stories of 2021,” December 21, 2021.