Have property insurers become too dependent on computerizedcatastrophe models, and if so, what is the alternative, given thepotentially huge exposures they face? Those were some of theprovocative questions raised yesterday by one of the pioneers ofcat modeling, Karen Clark.

Insurers have stopped thinking about risks independently, accordingto Ms. Clark, president and chief executive officer of Karen Clark& Company in Boston. You may be more familiar with her asfounder of the first cat modeling company, Applied InsuranceResearch–later known as AIR Worldwide Corp. after its acquisitionby the Insurance Services Office in 2002.

Ms. Clark is now a cat guru of sorts. Her consulting firm,according to her Web site,“helps senior executives and boards of directors make sure theircompanies have in place effective risk management processes thatconform to best practices” when it comes to disaster exposures.

It's ironic that now that she's out of the business of catmodeling per se, she feels free to challenge insurer use of suchtechnology to better assess disaster exposures.

Her message seems to be that cat models, while useful, are ablunt instrument, while emphasizing that underwriting should remainas much an art as a science. In other words, don't blindly followthe models, but instead treat each risk individually. Go with yourgut, and use common sense.

Speaking yesterday in New York during an Association ofProfessional Insurance Women luncheon, Ms. Clark emphasized thatmodels are not designed to replace underwriters, but instead aremerely best estimates. They certainly shouldn't be the final wordon which risks are acceptable and which are not, she added. (ForPhil Gusman's complete coverage of the speech, click here.)

Weve become a modeling society, Ms. Clark said, noting that someinsurers had confessed to her they followed whatever the modelstold them, even if the numbers don't look quite right!

That jives with what I heard in London last October at an ACORDforum, when underwriters admitted that many employed two or eventhree competing models–which rarely agreed on exposure–hoping toget a range and a comfort zone within which to safely operate.

Ms. Clark's candid speech and my own experience in London makesme wonder why insurers should even bother with computer models ifthey don't really tell them anything definitive about the risksthey face.

The answer, I believe, is that the cat models, however flawed,are literally better than nothing, especially with insurers undertremendous pressure from rating agencies, stock analysts and theirown senior managements, board members and shareholders todemonstrate they have a firm grip on such exposures.

What else could they do, buy a crystal ball?

I also think that insurers–burned by back-to-back monster stormseasons in 2004 and 2005–are also choosing to err on the side ofcaution, with the cat models giving them cover to take a moreconservative approach.

A big part of the problem is that some major carriers, waybefore the extensive use of cat modeling, allowed themselves tobecome overexposed to windstorm losses in vulnerable areas, such ason Long Island and along the Gulf Coast. Again, the cat modelsmerely provided some objective proof that by cutting back inheavily exposed regions, they were merely being prudent.

That said, Ms. Clark's main point is sound–that underwritersshould be considering individual applicants and not rejecting allrisks in a hot zone out of hand. Following two very quiet hurricaneseasons, it might help restore some credibility with regulators andget consumer advocates off their backs if they demonstrate theyhave not become enslaved by a computer program, but are in factmaking sound, case-by-case decisions.

They may not have much choice, as simply citing models tojustify rash pullbacks in any specific area is unlikely to carrymuch weight with the industry's clients and critics, now that a catmodeling icon has let the cat out of the bag.

What do you folks think?