The re/insurance industry’s outsourcing of catastrophe risk modelling is a “dangerous phenomenon” that introduces an unacceptable level of volatility in insurance markets, the CEO of Validus Re warned.Speaking at a Guy Carpenter symposium in Baden-Baden, Germany this week, Kean Driscoll raised concerns about the use of third-party catastrophe models.“By outsourcing the pricing of catastrophe risk to third party vendor models, the reinsurance industry is introducing an unacceptable level of volatility,” he said.“Reinsurers and clients should be committing more resources to better understanding the complexity of catastrophe risk, and building the costs into their pricing,” he said.Mr Driscoll argued that the reinsurance industry relies too heavily on third-party vendors for the pricing of catastrophe risk.“Billions of dollars of investor capital is being exposed by reinsurers who essentially outsource their pricing function to a third party vendor.”Mr Driscoll warned the reinsurance industry’s over-reliance on third-party vendor models to price catastrophe risk could cause problems similar to the ones seen during the financial crisis.Referencing the single model used by Wall Street for the trading of asset-backed securities, he said that traders had stuck with this model even when serious doubts were cast over its accuracy because it had allowed them to make a lot of money.He said the subsequent fallout should be seen as a cautionary tale for catastrophe underwriters.“We saw the implications for the global financial market when housing prices rapidly dropped and by outsourcing prices and risk management duties with respect to cat risk, the industry risks doing the same.”Driscoll cautioned the phenomenon could lead to industry-wide mispricing and “unacceptable volatility” due to unity of approach.The Bermuda-based Validus Re executive said that recent catastrophe had already exposed the limitations of vendor models.He pointed out that, according to the vendor models, the chance of the Tohoki earthquake that struck Japan in March of 2011 was “effectively zero”.In addition, no vendor model for New Zealand used damage factors that were anywhere near the 35 percent to 50 percent recorded in Christchurch.Mr Driscoll appealed to the audience of nearly 600 to work harder on internally modelling risk, insisting that reinsurers should be “driving” the advances in understanding cat risk.