Insurance Brokerage Company uses a computer-based method of estimating the losses its clients will suffer if a severe storm or earthquake occurs.

This method of estimating losses is called:

A) capital budgeting.

B) securitization of risk.

C) risk mapping.

D) catastrophe modeling

Answer: Catastrophe modeling (D)

Explanation:

Catastrophe modeling also called cat modelling is the means of using computer assisted calculations to evaluate the losses that could occur as a result of a disastrous event such as a earthquake or hurricane. It is mainly relevant in insurance industries to get information about the worth of their exposed assets.

Catastrophe modeling is useful in the optimization of portfolios and better decision making. It estimates the intensity and magnitude of the event to ascertain the amount of damage done, before computing the amount of loss incurred as a result of each catastrophic event.

Answer: D. Catastrophe modeling

Explanation: A catastrophe is a disaster beyond expectations. It denotes a natural or man-made disaster that is unusually severe. The Catastrophe modeling process uses computer-assisted simulations to estimate the losses due to a catastrophic event such as a hurricane or earthquake that could be sustained. It does this by generating a wide range of simulations where it estimates the magnitude, intensity and location of the event to determine the amount of damage, before determining the amount of insured loss as a result of each catastrophic event. Catastrophe modeling allows insurers and reinsurers, financial institutions, corporations, and public agencies to evaluate and manage catastrophe risk from perils.