BCAR.Cat

Question 1

Briefly explain why is a cat loss a big threat to financial health.

Answer 1

Cats are Significant, Unexpected and Rapid. (SUR)

Question 2

Identify 2 Best’s expectations for insurers accepting cat risks.

Answer 2

insurers must demonstrate ability to:

• MANAGE cat risk
• ABSORB potential losses

Question 3

Explain the standard BCAR score.

Answer 3

measure of an insurer’s financial strength (includes a component for catastrophes)

Question 4

Explain the stressed BCAR score.

Answer 4

• a score that reflects the ability of an insurer to continue operating even after a castastrophe
• based on natural catastrophe stress test

Question 5

Identify 4 factors affecting the tolerance for stressed BCAR scores.

Answer 5

1. financial flexibility:
- tolerance is HIGHER if the company is willing & able to replace capital after an event
2. historical volatility
- tolerance is LOWER if the company has as history of volatile operating performance
3. frequency of severe exposures
- tolerance is LOWER if the company has multiple exposures to severe events in a single season
4. risk management
- tolerance is HIGHER if the company has good/experienced risk management

Question 6

Identify the 4 steps in natural catastrophe stress test.

Answer 6

[1] surplus
- reduce reported surplus by PML (net post-tax 1-in-100 year event)
[2] reinsurance
- increase reinsurance recoverables by at least 40% of ceded PML
[3] reserves
- increase reserves by 40% of net PML
[4] optional
- adjust PMLs used in cat risk portion of standard BCAR score due to changes in reinsurance structure after 1st cat event
Then, recalculate BCAR score

Question 7

What is the purpose of the A.M. Best natural catastrophe stress test

Answer 7

test financial condition of insurer after 2 major catastrophe events

Question 8

Identify 1 similarity and 1 difference between BCAR Cat and FCT

Answer 8

SIMILARITY: both test multiple events
DIFFERENCE: BCAR tests 2nd non-concurrent event