BCAR.Cat Flashcards
Why is CAT loss a big threat to financial health
CATs are SUR (Significant, Unexpected, Rapid)
Identify drivers for recent increase in frequency/severity of CATs
Frequency: climate change
Severity: increase in insured values & cost of construction materials to rebuild
Identify Best’s expectations for insurers accepting CAT risks (2)
Insurers must demonstrate ability to:
- MANAGE CAT risk
- ABSORB potential losses
What is a standard BCAR score?
A measure of an insurer’s financial strength (includes a component for catastrophes)
What is a stressed BCAR score?
A score that reflects the ability of an insurer to continue operating even after a catastrophe
Based on natural catastrophe stress test
- The standard BCAR score already has a catastrophe component so the stress score measures the impact of a second catastrophe
Identify factors/considerations in adjusting an insurer’s rating based on it’s stressed BCAR score (4)
Financial flexibility:
- Tolerance is HIGHER if the company is willing and able to replace capital after an event
Historical volatility:
- Tolerance is LOWER if the company has a history of volatile operating performance (or for a newer company as well)
Frequency of severe exposures
- Tolerance is LOWER if the company has multiple exposures to severe events in a single season
Risk managment:
- Tolerance is HIGHER if the company has good/experienced risk management
Explain the rationale for testing a second catastrophic event in the BCAR model for the natural catastrophe stress test
After a catastrophic event, the insurer retains its exposures. Testing a second catastrophe is to better assess the stressed profile of an insurer.
What is the purpose of the A.M. Best natural catastrophe stress test?
The purpose is to test how sensitive a company’s balance sheet strength is to a second catastrophic event
Describe the elements of strong CAT risk management (4)
Catastrophe modeling:
- Parameter selection is critical
- Use more than 1 model
Data quality (to have strong data quality, must ensure/do):
- Accurate property location & coding
- Models used to assess property value & insurance to value
- Conduct site reviews (so that information is up-to-date)
- Safeguards to prevent an underwriter or an agent from manipulating the system by miscoding business to get a more favorable classification
- Conducting data verification and validation
Aggregate loss exposure:
- Use aggregate loss exposure as a secondary test of model
- Better ERM practitioners establish specific, reasonable, and defensible zonal or other aggregate exposure limits, and consider potential unmodeled scenarios in additional to model output to ensure they are not overexposed to unforeseen events
Monitoring: (MML)
- Measure, Monitor, Limit exposure on a continuous basis (not just an annual run of CAT models) for companies with material CAT exposure and effective ERM programs
Describe the steps in the natural catastrophe stress test
- Surplus
- Reduce reported surplus by 1-in-100 year net post-tax PML - Reinsurance
- Increase reinsurance recoverables by at least 40% of 1-in-100 year ceded pre-tax PML - Reserves
- Increases reserves by 40% of 1-in-100 year net pre-tax PML (may be adjusted based on reinsurance structure) - Optional
- For those carriers that have changes to the reinsurance structure after the first event occurs, the net pre-tax PMLs (including reinstatement premiums) may be adjusted accordingly
How do earthquakes (or any CAT event) impacts BCAR surplus in AM Best’s BCAR Score
Reduce reported surplus by PML (net post-tax 1-in-100 year event)
