Catastrophe modeling uses what to forecast losses and guide reserve planning?

• A. Subjective judgments without data.
• B. Only historical premiums.
• C. Data-driven models to forecast losses from large events, guiding risk appetite, pricing, and reserve adequacy.
• D. A guarantee of no losses.

Answer: (C)

Catastrophe modeling relies on data-driven models that simulate a wide range of large-event scenarios using historical event data, current exposure information (asset values, geographic distribution, construction types), and vulnerability relationships. These models produce probabilistic loss estimates and the distribution of potential losses, including extreme tail outcomes. Insurers use these outputs to set risk appetite, guide pricing and product design, and ensure reserves are adequate to cover severe but plausible events. Relying on subjective judgments without data would be inconsistent, using only historical premiums ignores exposure and event risk, and there is no guarantee that losses won’t occur.