Montpelier Group Licenses AIR Worldwide’s U.S. Crop Model

Boston — AIR Worldwide Corp. (AIR), a risk modeling software and consulting services firm, reports that Montpelier Group, a Bermudian reinsurance company for the global insurance market, has licensed the AIR Multiple Peril Crop Insurance (MPCI) model for use in AIR’s CATRADER, an application for analyzing catastrophe reinsurance and insurance-linked securities.

Paul Larrett, chief treaty underwriter at Montpelier Re Bermuda says, “Montpelier Group uses the AIR crop model as one of the tools to price MPCI stop loss treaties, and to manage our overall MPCI portfolio exposures. The model allows for correlation of stochastic events across multiple cedants since our loss for each of the 10,000 simulated events can be summed across cedants. We are, therefore, able to estimate our expected losses at different return periods across our entire MPCI portfolio.”

The AIR MPCI model uses detailed weather observations over the course of past growing seasons along with the resulting crop yields to develop a current crop yield probability distribution for each modeled crop in each county, which says the company, is more accurate than other modeling approaches. For major crops in the United States, the model generates a catalog of 10,000 potential year-end outcomes, including crop yields at county resolution and individual crop prices. The AIR crop event catalog captures the yield correlations between crops and between neighboring counties to capture the effects of widespread weather events, such as droughts. Crop insurance policy terms are applied to the modeled yield and price scenarios to quantify gross insured losses. The model also accounts for the Standard Reinsurance Agreement (SRA) provided by the U.S. government to estimate retained losses for the crop insurer.

“The AIR model addresses significant weaknesses in traditional crop models,” says Dr. Oscar Vergara, senior account executive at Boston-based AIR Worldwide. “It accounts for the effect of weather on crop yields, technology improvements and commodity price fluctuations, changes in the policy types and their market penetration, and changes in the SRA program to provide the most accurate probabilistic estimate of potential losses. AIR’s crop model results are used by leading reinsurers to analyze reinsurance submissions from the MPCI program.”

Major crop insurers, representing more than 60% of the MPCI premium base, utilize AIR MPCI model results to assess policy risk and allocate policies to the various risk sharing funds available in the SRA program.

Source: AIR Worldwide Corp.