Hemant Shah: A True Model for Embracing Change [Entire Talk]

TL;DR

Sustainable growth comes from repeatedly adapting a company’s geographic reach, product scope, technology, and value proposition while preserving a clear customer purpose. RMS grew from one California earthquake model into a global catastrophe-modeling firm by expanding into additional hazards and exposures, adopting recurring subscriptions, increasing computational capacity, and embedding its analytics in institutional risk decisions.

Transcript

Thank you, Heidi. I am definitely a Stanford brat. When I finally got married in 1998 and Danielle and I decided to move to San Francisco, my mother was in tears. She is like oh my God, you're leaving us. Like you're moving all the way to San Francisco. I'm like mom I'm finally leaving the zip code for the first time in my life. I would also like t... Read More

Key Insights

• RMS began as a Stanford class project when Hemant Shah and other engineering graduate students wrote a business plan for a high-technology startup. The plan drew inspiration from his father’s pioneering earthquake-risk research and developed into a commercial catastrophe-modeling company.
• RMS grew through geographic, peril, and exposure expansion. It moved from one earthquake model covering three California cities to models spanning the United States, Japan, and other global geographies, while adding climatic hazards, terrorism, pandemics, longevity, and other interconnected risks.
• A catastrophe model is a composite stochastic system rather than a single closed-form equation. It connects event frequency and location with local hazard effects, exposed buildings or portfolios, physical damage, possible human harm, and the resulting financial consequences.
• An exceedance probability curve expresses the chance that losses will reach or surpass a specified amount during a given period. Shah’s example indicates a 1% annual probability that an asset will experience at least $200 million in losses from modeled events.
• RMS developed an institutional subscription business with annual recurring revenue. Hundreds of clients license its models, data, analytics, and intellectual property, with individual annual client revenue ranging from approximately $100,000 to more than $10 million for its largest client.
• RMS analytics are embedded in insurance, reinsurance, and specialist investment activities. Clients use the models to price, structure, and underwrite risk, assess capital and exposure, and develop mitigation strategies intended to reduce the consequences of catastrophic events.
• Catastrophe modeling requires substantial data and computing resources. Model inputs can occupy gigabytes, while the output from one analysis can reach terabytes and, in some cases, petabytes, creating pressure to modernize how models and results are distributed and processed.
• RMS helped analyze the New York City subway system after Hurricane Sandy. The work supported construction of a parametric hedge tied to future storm-surge flooding, enabling the transit authority to structure a bond and transfer some financial risk to capital-market investors.

Questions & Answers

Q: How did RMS begin as a catastrophe-modeling company?

RMS began with a business plan created at Stanford for an entrepreneurship in high-technology class. Hemant Shah and several fellow engineering graduate students prepared the plan to satisfy a course requirement, then continued refining it with help from professors. His father’s pioneering research in earthquake-risk assessment supplied both inspiration and practical support. The resulting company was initially called Risk Management Software and later became Risk Management Solutions.

Q: How did RMS expand its catastrophe-modeling business?

RMS followed a strategy of expanding along three dimensions. It increased geographic coverage from three California cities to the United States, Japan, and other global locations. It added perils beyond earthquakes, including hurricanes, cyclones, typhoons, floods, fires, winter storms, tornadoes, hail, terrorism, and pandemics. It also broadened the physical and financial exposures its models could analyze for institutional clients.

Q: What is a catastrophe model and how does it work?

A catastrophe model is a composite model that uses stochastic techniques to represent how destructive events occur and produce losses. An earthquake model, for example, estimates event frequency and location, local ground shaking, a building’s exposure, physical damage, possible harm to occupants, and the resulting financial consequences. Similar model architectures can be applied to climatic hazards, terrorism, disease pandemics, and other risks.

Q: What is an exceedance probability curve in risk modeling?

An exceedance probability curve shows the probability that losses to an asset or portfolio will equal or exceed a specified financial amount within a given period. Shah gives an example in which a point on the curve represents a 1% annual chance of $200 million or more in losses. The analyzed asset might be one industrial facility, an urban area, or millions of insurance policies.

Q: What business model does RMS use for its analytics?

RMS primarily uses a subscription business model that licenses its models, data, analytics, and intellectual property for annual recurring revenue, although it also performs some consulting work. The company serves hundreds of institutional clients rather than a mass consumer audience. Annual revenue from an individual client ranges from about $100,000 to more than $10 million for the company’s largest single client.

Q: How do insurers and investors use catastrophe models?

Insurance companies, reinsurers, and specialist investors use RMS models to understand and manage financial exposure to catastrophic events. The analytics support decisions about pricing, structuring, and underwriting risk. They also help institutions assess capital requirements and accumulated exposure, then develop and implement mitigation strategies designed to reduce the financial and physical consequences associated with disasters.

Q: Why did RMS move its catastrophe-modeling platform toward the cloud?

RMS moved toward the cloud as its model suite and data requirements grew dramatically. Its first release covered earthquake risk in three California cities and shipped on 17 5.25-inch floppy disks. Shah estimates that the 2013 global, multi-peril release would have required about 500,000 such disks. Individual analyses can also produce terabytes or petabytes of output, demanding substantial computing and distribution capacity.

Q: How did RMS help manage future New York subway flood risk?

After Hurricane Sandy flooded and submerged the New York City subway system, RMS was retained to analyze the system’s exposure to future storm-surge flooding. The analysis helped construct parameters for a parametric hedge. Those parameters could trigger a bond arrangement that transferred part of the transit authority’s future financial risk from flooding losses to investors in the capital markets.

Summary

In this video, the speaker shares the background and journey of RMS, a catastrophe modeling firm. He discusses the company's beginnings, the challenges faced during the experimentation phase, the establishment of the business model, and the need for reinvention. He also talks about the recent pivot in strategy and the challenges faced during this transformation.

Questions & Answers

Q: How did the speaker's upbringing influence his decision to start a business?

The speaker's father, a professor at Stanford, inspired him to start RMS by his pioneering research in earthquake risk assessment.

Q: How did the speaker and his co-founder come up with the idea for RMS?

While taking a class together at Stanford, the speaker and his friends had to write a business plan for a high-technology start-up. They developed the business plan for what became RMS.

Q: What was the initial focus of RMS?

RMS initially offered a single earthquake risk model for three cities in California.

Q: How did RMS expand its business over the years?

RMS extended the geography of its models from California to the United States and then to other countries. They also expanded the number of perils they modeled, from earthquake hazards to a range of climatic hazards, terrorism hazards, disease pandemics, and more.

Q: What is a catastrophe model?

A catastrophe model is a composite model that uses stochastic techniques to characterize the underlying characteristics of a particular type of catastrophic event, such as earthquakes or climatic hazards. It assesses the frequency and consequences of these events and the exposure and financial impact on assets.

Q: How did RMS use its catastrophe models to help the New York City subway system?

After Hurricane Sandy, RMS helped the New York City subway system construct a parametric hedge against future flooding losses. They analyzed the subway system's risk to flooding and helped construct the parameters for a bond that laid off the financial risk to investors.

Q: What was the mindset behind the decision to sell the business?

The speaker and his team saw the business as maturing and saw an opportunity to sell and move on to the next venture.

Q: How did RMS overcome the mature market fallacy?

The speaker and his team decided to re-envision the business and continue growing instead of settling for being a niche analytics firm. They re-upped with more equity, developed new ideas, and focused on deepening their relationships with customers.

Q: What challenges did RMS face during its recent pivot in strategy?

The pivot required a significant change in the company's value proposition and how it added value. The speaker had to overcome internal resistance, align the organization, and convince employees of the need for change.

Q: How is RMS positioning itself in the market with its new strategy?

RMS is positioning itself as an environment for resilient and real-time exposure and risk management. They are delivering their core system, RMS(one), as a cloud-based service and targeting a much larger addressable market.

Takeaways

RMS's journey from a start-up to a mature company and its recent pivot in strategy highlight the importance of continually reassessing and reinventing one's business. Success can be achieved by experimenting with new ideas, establishing a coherent product strategy, and staying open to change. Overcoming internal resistance and leading the organization through change can be challenging but necessary for growth. The ability to adapt and evolve is crucial in the dynamic business environment.

Summary & Key Takeaways

• Hemant Shah traces RMS to a Stanford entrepreneurship class, where engineering students had to prepare a business plan for a high-technology startup. Inspired by his father’s pioneering earthquake-risk research and supported by Stanford professors, Shah and his collaborators turned that academic assignment into Risk Management Software, later known as Risk Management Solutions.

• RMS expanded through a straightforward strategic playbook: broaden the geography covered, add more types of catastrophic peril, and model additional physical and financial exposures. Its offerings grew from earthquake risk in three California cities to global models addressing climatic hazards, terrorism, pandemics, longevity, supply chains, and financial contagion research.

• Catastrophe models combine stochastic event occurrence, local hazard intensity, exposed assets, physical damage, human harm, and financial consequences. Their outputs include individual scenarios, integrated risk maps, and exceedance probability curves. RMS applies these analytics to institutional decisions such as pricing insurance risk and constructing a parametric hedge for New York’s subway system.