Glossary

Catastrophe model

Software that simulates thousands of hurricanes, earthquakes and other disasters against a portfolio of locations to estimate insured losses and odds.

Also called: cat model, nat cat model, catastrophe modeling, cat modeling

A catastrophe model estimates the losses a portfolio of insured property might suffer from natural disasters. Vendors such as Verisk and Moody's RMS build models in three parts: a hazard module that generates a stochastic set of simulated events (hurricanes, earthquakes, wildfires, floods, severe convective storms), a vulnerability module that estimates damage by construction type, age and occupancy, and a financial module that applies deductibles, limits and reinsurance to produce insured loss.

The outputs are probabilities, not forecasts. Average annual loss is the expected yearly cost; the exceedance probability curve shows the chance that losses reach a given amount in a year; a 1-in-100-year loss is the point with a 1% annual chance of being exceeded. Insurers use them to price, manage concentrations in one region, buy reinsurance and satisfy rating agencies. Underwriters feed them the occupancy, construction, year built and values from your statement of values.

For a business buyer, the model is why a coastal or wildfire-zone location can see pricing or terms change when the vendor updates its view of risk, even with no losses of your own. Model output is only as good as the data: wrong construction class or understated values distorts the result and the price. The guide on catastrophe models: how insurers price hurricanes, quakes and fires explains how to prepare data, and probable maximum loss describes the related measure.

Last reviewed October 10, 2026

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Related terms

Probable maximum loss (PML) An estimate of the largest loss a location, portfolio or event is likely to produce, used to set limits, size reinsurance and satisfy lender requirements. Statement of values A schedule listing each insured location with its building, contents and income values and construction details, used to rate and model a property program. Treaty reinsurance A reinsurance contract that automatically covers a defined portfolio of an insurer's policies, instead of reinsuring one risk at a time. Catastrophe bond A security sold to investors that pays interest but loses principal if a defined catastrophe occurs, giving an insurer or reinsurer multiyear protection. Rate on line The premium for a layer of reinsurance or excess coverage divided by that layer's limit, showing the price paid for each dollar of protection.

Related guides

The statement of values: what property underwriters need How to build a statement of values underwriters trust: the fields, ISO construction classes, replacement cost basis, and how errors in it surface in a claim. Catastrophe bonds and ILS: how they work and who they affect A cat bond lets investors fund disaster reinsurance and lose principal if a trigger is hit. How it works, what 2026 data shows and why buyers feel it. Catastrophe models: how insurers price hurricanes, quakes and fires How catastrophe models turn simulated storms and quakes into loss estimates, why your building data moves your premium, and where models fall short. Climate change and the commercial insurance market How rising catastrophe losses reach commercial property buyers through price, deductibles, roof terms and availability, and what to check at renewal in 2026. Climate risk disclosure rules for businesses: where they stand in 2026 The SEC climate rule is stayed and proposed for rescission; California's SB 253 first reports are due November 10, and SB 261 is enjoined. Who is covered. Earthquake insurance for businesses: coverage, deductibles, limits Commercial property policies exclude earthquake. How the endorsement or DIC policy works, why deductibles run 2% to 5% of values, and what underwriters ask for.