CAT XOL Flashcards
How are CATs trending?
Industry used to be worried about the 100B in a year in cat, now that’s common place; now worried about 100B in single event
TIV is growing as are the severity and frequency of storms
Even perils with low cat (scs and wildfire) are now hitting cat levels
4 major cat events to change cat property risk
(1) Hurricane Andrew
(2) Northridge EQ
(3) Hurricane Katrina
(4) World Trade
Hurricane Andrew Significance (5)
(1) first big cat
(2) 11 A-rated insurers bust
(3) AM Best revises their grading
(4) CAT modeling becomes bigger
(5) Florida Hurricane Cat Fund (FHCF) is created
Northridge EQ Significance (2)
(1) another huge personal lines loss
(2) causes California Earthquake Authority (CEA) to form
Hurricane Katrina (3)
(1) large commercial losses
(2) caused a spike in construction materials which lead to revised cat modeling
(3) flood was an issue / spotlight on Nat Flood Ins program
World Trade Significance
(1) first casualty, property, WC, and life catastrophe
(2) results in Terrorism Risk Insurance Act (TRIA)
(3) insurance industry creates terrorism exclusions
What’s covered in Per Occurrence CAT Coverage
Generally coverage for all property lines likely to be damaged in cat event
Coverage A - Dwelling
Coverage B - Other structures
Coverage C - Personal property
Coverage D - Loss of Use
APD - Comp
Personal lines drive cat losses
What inflates CAT losses
(1) Loss amplification – material more expensive post CAT
(2) Storm surge – water levels rising due to driving rain
(3) Business Interruption can be significant (e.g. oil rigs)
(4) Significant LAE costs – adjusters relocated
(5) Long tail losses
(6) large policyholder deductibles (wind deductibles, flood losses not covered)
How does a CAT respond?
Per occurrence XOL
Subject loss is usually reduced by inuring reinsurance
Very important what constitutes a CAT loss
Usually has limiting features like an AAD or FD
CAT requires 2 risks be involved in the same loss
CAT Functions of Reinsurance
Financing – NOT EFFECTIVE
Prem Capacity – NOT EFFECTIVE
Policy Limit – NOT EFFECTIVE
Stabilization – VERY EFFECTIVE
CAT Protection – VERY EFFECTIVE
Reinstatement Formula
Reinst Prem = Original Premium * (Limit Used / Original Limit) * Time Factor
Time Factor – often set at 100%
Extra notes on reinstatements (3)
Mandatory and simultaneous – RI remits net funds to the insurer
Reinstatements reduce economic value of reinsurance recoveries
Can prepay reinstatements for lower cost (but higher cost if not needed)
Rate on Line (ROL)
Pricing mechanism for cat covers
ROL = premium / layer limit
literally % of limit
Factors when setting retention (5)
(1) size of PHS / leverage ratio
(2) Sensitivity to rating agencies
(3) inuring reinsurance
(4) past loss experience
(5) price
Factors when setting limits (same as retention plus 3)
Same as the retention reasons plus:
(1) PML for major perils from CAT models
(2) Stress testing from rating agencies (AM best tests at 100 yrs so companies buy at least to 100 yrs)
(3) other CAT reinsurance
CAT Models
Answer how high losses could be – provide exceedance probability (EP) tables to for probable maximum loss (PML)
Provide average annual loss (AAL)
Broken down by LOB / State / Peril, etc. and is represented by return times (10yr, 50yr, etc.)
Model providers
RMS
Verisk / AIR
CoreLogic
Impact Forecasting (AON)
Types of CAT Losses (5)
(1) Non-specified Perils
(2) Wind (Hurricane, Tornado, Hail)
(3) Wildfire, Brush Fire, Other Fire
(4) Riot, Civil Commition, Vandalism
(5) Ice Dams, Winter Freeze, Collapse
Non-Specified Peril Conditions (2)
(1) 168 hours
(2) Contiguous areas req.
Wind (2)
(1) 120+ hours (used to be 72)
(2) does not have to be contiguous
Wildfire (2)
(1) 240 hours
(2) up to 250 (ex) mile radius after buyer selects location
RCCV
(1) 96 hours
(2) One city, municipality, or county
(3) exception for union activities
Ice Dams
(1) aggregate by cause of loss
(2) time varies
CAT Agg Basics (5)
(1) responds to net losses from multiple cat events
(2) may cover same lines as PO CAT XOL or additional lines
(3) no reinstatements
(4) usually retention is multiple of CAT XOL retention
(5) no req for CAT XOL to have a loss (e.g. 10 small CATs)
CAT Agg Limiting Factors
(1) Franchise Deductible
(2) PO Deductible – impacts each recovery
Building CAT Coverage
(1) Gross QS, Net CAT XOL – QS takes frequency, passes severe loss to CAT XOL (cheaper)
(2) Gross CAT XOL, Net QS – CAT takes severe losses, passes frequency to QS
All about the most efficient and cost effective way
Terrorism Risk Insurance Act (TRIA) – (3)
-Provides terrorism insurance
-Insurers keep 20% deductible
-Coverage is 85% of qualifying loss after deductible
Florida Hurricane CAT Fund (3)
(1) Mandatory participation for admitted FL residential insurers
(2) Insurers select 45%, 75%, or 90% coverage annually (90% most common) and absorb the difference net as co-pay
(3) No underwriting, all terms are the same, premium is based on exposure characteristics
Most insurers compliment with private reinsurance to buy up to 100yr PML
California Earthquake Authority
Writes primary EQ policies when private insurers stopped writing them
Mini policies, writes over 1M
Take up rate is still small
ASL Basics (6)
(1) well received by AM Best bc it’s very comprehensive coverage
(2) terrific for insurers struggling to consistently meet financial goals / ratios
(3) meant as a supplement / last line of defense
(4) will either help or hurt the insurers LR
(5) will never price the attachment point at a LR that would guarantee an insurer an underwriting profit
(6) Real benefit is the long tail protection against adverse development so companies will purchase for years and years
2 Issues for ASL Reinsurer
(1) Primary Rate Adequacy
(2) Inuring Reinsurance Costs
ASL Calculation Steps
(1) Calculate the gross LR
(2) Calculate SEP and SIL
(3) Calculate ASL Retention (greater of given retention or LR * SEP)
(4) Calculate ASL recovery (if there is one)
(5) Calculate cost of ASL
(6) Calculate net LR and benefit/cost of ASL
