BCAR.CAT

Question 1

Why is a CAT loss a big threat to the financial health of an insurance company?

Answer 1

Because CATs are:

• Significant;
• Unexpected; and,
• Rapid

Question 2

Identify drivers for recent increase in frequency/severity of CATs.

Answer 2

Frequency: Climate Change
Severity: Increased population density and, complexity of supply chains

Question 3

Identify Best’s expectations for insurers accepting CAT Risks. (2)

Answer 3

Insurers must demonstrate their ability to:

• Manage CAT risk
• Absorb potential losses

Question 4

What is a Standard BCAR Score?

Answer 4

A measure of an insurer’s financial strength. (NOTE: this measure already includes a component for CATs)

Question 5

What is a Stressed BCAR Score?

Answer 5

• A score that reflects the ability of an insurer to continue operating even after a catastrophe.
• Based on natural catastrophe stress test
  Recall: Standard BCAR score already includes a CAT component, so the Stressed score measures the impact of a second CAT.

Question 6

Identify considerations in adjusting an insurer’s rating based on it’s Stressed BCAR Score. (4)

Answer 6

1) Financial Flexibility: is the company willing and able to replace capital after an event? If yes, HIGHER tolerance.
2) Historical Volatility: does the company have a history of volatile operating performance? If yes, LOWER tolerance.
3) Frequency of Severe Exposures: has the company had multiple exposures to severe events in a single season? If yes, LOWER tolerance.
4) Risk Management: does the company have good/experienced risk management? If yes, HIGHER tolerance.

Question 7

Describe elements of strong CAT risk management. (4)

Answer 7

1) CAT Modeling:
- parameter selection is critical
- use more than 1 model
2) Data Quality:
- accurate property location and coding
- property value and insurance-to-value
- conduct site reviews (so that information is up-to-date)
- safeguards to prevent manipulation by customers
3) Aggregate Loss Exposure:
- use aggregate losses as a secondary test of the model
4) Monitoring: (MML)
- Measure, Monitor, and Limit exposure on a continuous basis

Question 8

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

Answer 8

To test the financial condition of insurer after 2 major CAT events.

Question 9

Describe the steps in the natural CAT stress test. (4)

Answer 9

1) Surplus:
- reduce the surplus by the 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

Question 10

How to earthquakes impact BCAR surplus?

Answer 10

Reduce reported surplus by PML (net post-tax 1-in-100 year event)

Question 11

What is the reason for testing a 2nd CAT event?

Answer 11

• the insurer still has exposure to CAT events after the 1st CAT event
• including the 2nd CAT event provides a better assessment of the insurer’s financial condition

Question 12

Compare and contrast the testing of CAT risk for BCAR vs DCAT.

Answer 12

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