Estimating the Cost of Commercial Airlines Catastrophes- A Stochastic Simulation Approach

Actuaries are increasingly finding more applications for stochastic simulation in pricing, reserving, DFA, and other insurance and financial engineering problems. For instance, stochastic simulation has gained acceptance as a pricing tool for property catastrophe coverage in the insurance, reinsurance, broker, and investment communities. This has required primary companies to compile and provide information at a more detailed level than they did only a few years ago. Various commercial simulation products have emerged to help companies assess and price their property catastrophe exposures. Although there are many parallels between the catastrophe exposures of property and commercial aviation risks, the use of simulation is not widespread in the assessment of commercial aviation catastrophic exposures. In this paper, we present the framework for a simulation model for commercial aviation catastrophes and we discuss various aspects of designing such a model including the level and type of information needed.