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The Importance of Uncertainty in Catastrophe Modeling

"Why Cat models predictions are often low when compared to post-event claims"

Properly considering and handling uncertainty and using full probabilistic distributions of random parameters due to natural hazards is essential in estimating economic losses. The underlying natural phenomena demonstrate significant randomness in frequency and severity while models, which describe the process, are limited by incomplete scientific understanding. Hence, the need to understand the uncertainty involved in the loss estimation process is apparent in the development of catastrophic risk modeling. Significant errors in the decision making process, related to potential catastrophic losses, are likely due to the failure to properly consider uncertainty.

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