C - AM Best Catastrophe Analysis Flashcards
AM BEST CATASTROPHE ANALYSIS
3 keys of a strong CAT risk management
- -DATA QUALITY–
- proper coding of loss exposures
- update I-T-V model
- perform site reviews
- implement safeguards (such as audit of UW info) to prevent manipulation
- -MONITORING EXPOSURES–
- careful monitoring of ZONAL AGGREGATE
- “what-if” scenario testing using severe events in areas with concentrated exposures
- review AGGREGATE loss-exposure accumulation
- ONE OR MORE cat models are used
- -CONTROLS–
- CAT MANAGEMENT is integrated INTO THE UW PROCESS
- is a CONTINUAL process, not just an annual run of CAT model
AM BEST CATASTROPHE ANALYSIS
2 causes of the increased of Freq and Sev in meteorological event
–freq–
GLOBAL WARMING
contribute to increase in number of severe events, leading to higher frequency
–severity–
POPULATION GROWTH
concentration in urban areas, insurable values are rising, leading to higher severity
AM BEST CATASTROPHE ANALYSIS
4 items of proper coding of loss exposure
- QUALITY DATA
- ACCURATELY MAPPED LOCATIONS
- PROPERTY CODING
- MODELS TO ASSESS PROPERTY VALUES
AM BEST CATASTROPHE ANALYSIS
5 property attributes that need to be obtained once location of property is collected.
1) STRUCTURE OF BUILDING
2) NB OF FLOORS
3) YEAR OF CONSTRUCTION
4) TYPE OF ROOF
5) TYPE OF ROOF OF SURROUNDING BUILDINGS
AM BEST CATASTROPHE ANALYSIS
AM Best’s expectations for mgmt in terms of cat analysis
1) to know the specific issues of their own geographic exposures
2) to articulate their RISK TOLERANCE LEVEL towards CATS, given their importance in ratings
AM BEST CATASTROPHE ANALYSIS
One strategy (other than additional reinsurance) that some carriers opted for after KRW (Katrina Rita Wilma)
Gradual withdrawal from the exposed area
rather than purchasing add’t reinsurance
AM BEST CATASTROPHE ANALYSIS
2 abilities on which CAT risk management is evaluated which, once demonstrated, will provide the greatest amount of flexibility within AM Best Stress Test
1) Ability to avoid material loss of capital
2) Ability to respond to a significant capital deterioration after an event.
AM BEST CATASTROPHE ANALYSIS
What AM Best will do if those items are not included in the PML
-DEMAND SURGE
-STORM SURGE
-LOSS ADJUSTMENT EXPENSES
-ADDT LIVING EXPENSES
-NEAR-TERM EVENT SET
—-
-property structure and content
- business interruption
-flood
- auto/motor physical damage
- WC
- Energy
- Ocean and Inland Marine
- Crop insurance
—-
increase the expected loss estimate by a conservative margin for inclusion in the BCAR
AM BEST CATASTROPHE ANALYSIS
Why SITE REVIEWS as a verification on a timely basis in integral to the quality of data
without this updated info, rate might not reflect the potential exposure, and could put the insurer at a disadvantage
AM BEST CATASTROPHE ANALYSIS
One way to prevent agent from manipulating system by miscoding business to get a more favorable classification.
AUDIT OF UW INFORMATION to ensure errors and bulk coding are not occurring
Ensure to receive quality information
AM BEST CATASTROPHE ANALYSIS
calculations performed in BCAR for the natural catastrophe stress test.
(1) reduce surplus by after-tax-net-PML of 1st event
(2) increase reins. Recov. by 40% of ceded before-tax-PML of 1st event
(3) increase unpaid clms by 40% of net-before-tax-PML of 1st event
(4) reduce adjusted surplus from (1) from after-tax-net-PML of 2nd event
(5)
Iif 1st event is hurricane/windstorm, use same PML in (1) and (4)
If 1st event is EQ, surplus is reduced by 1-in-100 year loss in (4)
AM BEST CATASTROPHE ANALYSIS
Contrast approach used to test catastrophe risk under
BCAR and DCAT (1 similarity, 1 difference)
–similarity–
testing multiple events
–difference–
different severity thresholds, different probability level, different confidence level, BCAR tests 2nd event
AM BEST CATASTROPHE ANALYSIS
purpose of AM BEST’s natural catastrophe stress test
stress-tested BCAR
to test how sensitive the Balance Sheet Strength is to a 2nd CAT event
AM BEST CATASTROPHE ANALYSIS
3 factors that will impact the tolerance level on the stressed BCAR vs standard BCAR
FINANCIAL FLEXIBILITY
cies with ability to :
1) avoid material loss of capital and
2) replace lost capital immediately after event
will have greater leeway on disparity in standard BCAR and stressed BCAR
ASSESSMENT OF HISTORICAL VOLATILITY
of both the balance sheet and operating performance
EXPOSURE TO MORE FREQUENT SEVERE EVENTS
hurricane, tornado, hail exposed regions
