This is a short blog on a complex subject – but you heard it here first. Insurance industries are embracing complex software programs that are engaged in CAT modeling – short for Catastrophe modeling – which entails incorporating an enormous amount of data into the risk analysis process.

The computers at Risk Management Solutions in California contain mathematical models of every U.S. disaster from the 1812 earthquake that toppled chimneys in St. Louis to the 9/11 assault that brought down the twin towers in New York, as well as 100,000 synthesized “extreme events.”

RMS runs its disasters through your community – and sometimes right through your home – to see how you’d fare in a hurricane, hailstorm, earthquake, epidemic or terrorist attack. The firm sells its knowledge to insurance companies to help them decide whom to cover and how much to charge.

This technology is reshaping the nation’s $626-billion property casualty insurance industry. It is using this massive assemblage of data to replace traditional uniform coverage at uniform rates with an increasingly wide array of policies at widely varying prices.

Traditionally, insurance companies group people facing similar dangers into pools. Company actuaries determine how the frequency of accidents or illnesses that have befallen pool members in the past and resulted in claims. Insurers set their rates based actuarial predictions. This approach encourages pools as big as possible, since the bigger the pools, the more the actuaries have to work with; the result is greater accuracy.

But insurers are in the business of speculating on the future. The question has always been: what if insurers could know more in advance? That’s the promise of CAT modeling and new data-mining methods that let companies use a person’s income, education or ZIP code to predict future claims. It is allowing insurers to raise rates or refuse coverage for the very people who need it most – low- and moderate-income families, for example, or those who’ve suffered such setbacks as unemployment.

As the industry expands its ability to “slice and dice” customers and applicants, one State Commissioner of Insurance worries that “the risk-transfer mechanism at the heart of insurance could break down – if that happens, insurance will stop functioning as insurance.”