B.2. Large Events and Anomalies

Question 1

Shock loss examples

Answer 1

Major auto accident involving multiple claimnats
Total loss on a large home
Permanent disability injury for a young worker

Question 2

What happens to future losses when you don’t smooth out shock or catastrophe losses

Answer 2

Overestimate future losses when they are in there

Underestimate if they are ignored

Question 3

Shock loss definition may vary by insurer

Answer 3

Size of book of business

Question 4

Ways to adjust for shock losses

Answer 4

1. Cap losses at basic limits
2. Cap losses and apply an excess loss loading
3. Remove ground-up shock losses and apply a shock loss loading

Question 5

Common choices for shock caps

Answer 5

1. Arbitrary amount
2. A percentile of loss distribution
3. Loss as a percent of the insured value

Question 6

Ways to account for changes in severity for excess loss loads

Answer 6

1. Using a cap level based on future policy period cost levels, and trending historical losses to this cost level. Then calculate ratio of trended excess losses to non-excess trended losses
2. Indexing cap level to reflect changing loss levels, so cap varies for each year

Question 7

How to decide number of years to use for excess or cat load

Answer 7

Balance stability of long-term average with responsiveness to changes

Question 8

Non-pricing measures to mitigate CAT exposure

Answer 8

Restricting writings in high risk areas, requiring higher deductibles, purchasing reinsurance

Question 9

Why CAT loads are split into modeled and non-modeled components

Answer 9

Non-modeled are frequent enough that a long term average provides reliable estimate
CAT models are used to estimate events like earthquakes or hurricanes where a long term average still does not have enough to data to be reliable