C - OSFI Earthquake

Question 1

OSFI EARTHQUAKE

Define
Risk Appetite
Risk Tolerance

Answer 1

–risk appetite–
QUALITATIVE ASSESSMENT
total level and type of exposure an insurer is willing to take to achieve business objectives

–risk tolerance–
Limit on level and AMOUNT of risk an insurer is willing to accept (for each relevant risk)

Question 2

OSFI EARTHQUAKE

Define PML (Probable Maximum Loss)

Define PML in the context of probabilistic models

Define Gross PML

Define Net PML

Answer 2

Threshold $ value of loss above which loss caused by a major EQ are unlikely.

$ value of loss expected to be exceeded once in every X years

PML (after deductible, but before reinsurance)

PML (after deductible, after reinsurance)

Question 3

OSFI EARTHQUAKE

Contrast :
Board, Sr Management and Actuarial responsibilities
on
EQ exposure risk management policy

Answer 3

Board
Oversight and Ensure Policy is effectively implemented

Sr Management

• Responsible for IMPLEMENTING the policies
• Exposure management should be an ongoing process

Actuarial

• review models used to determine exposures
• adequacy of reinsurance
• pricing of EQ insurance

Question 4

OSFI EARTHQUAKE

BOARD responsibilities about EQ policies and risk management?

Answer 4

• Ensure Controls are in place to monitor the effectiveness
• OVERSEE the development of EQ policies and ensure they are correctly IMPLEMENTED
• REVIEW AND DISCUSS in annual review of CAT risk Management.

Question 5

OSFI EARTHQUAKE

items that should be included the EQ policies and procedures.

Answer 5

• RISK APPETITE and RISK TOLERANCE for EQ insurance
• Data Mgmt practices
• EXPOSURE AGGREGATION Monitoring and reporting
• Estimation of PLM factors
• Adequacy of financial resources in relation to PML
• Contingency Plan
• Consideration of potential increase in operating costs.

Question 6

OSFI EARTHQUAKE

4 methods to improve the appropriateness, completeness and accuracy of the DATA COLLECTION of EQ data

Answer 6

• Score data quality at time of UW
• Delete sources with inadequate data
• Implement safeguards to prevent miscoding
• Invest in technology to improve data quality

Question 7

OSFI EARTHQUAKE

OSFI’s expectation on DATA VERIFICATION in EQ Risk Mgmt

Answer 7

• Insurers verify that their DBs capture all data received
• Reinsurers have processes to ensure quality of data received by cedent.
• Perform an aggregate analysis of overall data quality

Question 8

OSFI EARTHQUAKE

Role of Sr Mgmt in case of data limitation in EQ exposures

Answer 8

• to understand impact of data limitations on projections (and adjust with prudence)
• to review data annually by independent individuals
• to address concerns identified in reviews
• to select a time frame to update data and model results

Question 9

OSFI EARTHQUAKE

4 methods to TEST the completeness, accuracy and consistency of EQ exposure data.

Answer 9

1) summarize data by occupancy, construction, geocode
2) compare YoY exposure chg and compare with historical data
3) use historical experience to identify coding issues vs model constructions
4) run data quality sensitivity tests and incorporate them in risk decision making

Question 10

OSFI EARTHQUAKE

***7 BEST Practices for EQ Modeling

Answer 10

DOCUMENT
document use of model within Risk Mgmt program (ex. for measuring and monitoring exposures)

ALTERNATIVES
explain why a particular model is used vs alternatives

QUALIFIED
qualified employees runs in-house models regularly

KNOWLEDGE
must have knowledge of AML (ASSUMPTIONS, METHODOLOGIES, LIMITATIONS) of EQ model

DATA
should provide evidence that granularity and quality of data is appropriate

UNCERTAINTY
understand the impact of uncertainty on capital adequacy and reinsurance requirements

PMLs
if PML(model1) <> PML(model2) then must explain differences and any subsequent model adjustments

Question 11

OSFI EARTHQUAKE

3 sound practices for:

EQ MODEL VERSIONS

EQ MODEL VALIDATION

Answer 11

• -eq model versions–
  1) CONSIDER USE OF MORE THAN ONE MODEL

2) WHEN USING VENDOR SOFTWARE, UNDERSTAND THE MODEL, USE and LIMITATIONS
3) FOR IN-HOUSE MODELS, REGULAR UPDATE AND TEST PML REGULARLY against other commercial models.

• -eq model validation–
  1) ensure model prudently capture risk based on actual events

2) compare few major historical EQ to model and assess difference
3) compare the modeled tail losses to market price for reinsurance coverage
4) process should be documented

Question 12

OSFI EARTHQUAKE

4 financial resources that could be used to support EQ exposures

Answer 12

1) capital (surplus) 
Maximum 10% of capital and surplus
2) EQ reserves
3) reinsurance coverage
4) Capital Market financing (e.g. CAT bond)

Question 13

OSFI EARTHQUAKE

4 elements that a contingency plan should consider in case of a catastrophe

Answer 13

1) emergency communication
2) availability of claims personnel
3) off-site system backup
4) reinsurance records

Question 14

OSFI EARTHQUAKE

One restrictive condition for each of following FINANCIAL RESOURCES if insurer use them to support their EQ exposures

Capital Market Financing
Reinsurance Coverage

Answer 14

–capital market financing–
prior approval from OSFI before being recognized as FINANCIAL RESOURCE

–reinsurance coverage–
if non-cat reinsurance, must demonstrate that it considered per-event limits