CAT XOL

Question 1

How are CATs trending?

Answer 1

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

Question 2

4 major cat events to change cat property risk

Answer 2

(1) Hurricane Andrew
(2) Northridge EQ
(3) Hurricane Katrina
(4) World Trade

Question 3

Hurricane Andrew Significance (5)

Answer 3

(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

Question 4

Northridge EQ Significance (2)

Answer 4

(1) another huge personal lines loss
(2) causes California Earthquake Authority (CEA) to form

Question 5

Hurricane Katrina (3)

Answer 5

(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

Question 6

World Trade Significance

Answer 6

(1) first casualty, property, WC, and life catastrophe
(2) results in Terrorism Risk Insurance Act (TRIA)
(3) insurance industry creates terrorism exclusions

Question 7

What’s covered in Per Occurrence CAT Coverage

Answer 7

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

Question 8

What inflates CAT losses

Answer 8

(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)

Question 9

How does a CAT respond?

Answer 9

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

Question 10

CAT Functions of Reinsurance

Answer 10

Financing – NOT EFFECTIVE
Prem Capacity – NOT EFFECTIVE
Policy Limit – NOT EFFECTIVE
Stabilization – VERY EFFECTIVE
CAT Protection – VERY EFFECTIVE

Question 11

Reinstatement Formula

Answer 11

Reinst Prem = Original Premium * (Limit Used / Original Limit) * Time Factor

Time Factor – often set at 100%

Question 12

Extra notes on reinstatements (3)

Answer 12

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)

Question 13

Rate on Line (ROL)

Answer 13

Pricing mechanism for cat covers

ROL = premium / layer limit

literally % of limit

Question 14

Factors when setting retention (5)

Answer 14

(1) size of PHS / leverage ratio
(2) Sensitivity to rating agencies
(3) inuring reinsurance
(4) past loss experience
(5) price

Question 15

Factors when setting limits (same as retention plus 3)

Answer 15

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

Question 16

CAT Models

Answer 16

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.)

Question 17

Model providers

Answer 17

RMS
Verisk / AIR
CoreLogic
Impact Forecasting (AON)

Question 18

Types of CAT Losses (5)

Answer 18

(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

Question 19

Non-Specified Peril Conditions (2)

Answer 19

(1) 168 hours
(2) Contiguous areas req.

Question 20

Wind (2)

Answer 20

(1) 120+ hours (used to be 72)
(2) does not have to be contiguous

Question 21

Wildfire (2)

Answer 21

(1) 240 hours
(2) up to 250 (ex) mile radius after buyer selects location

Question 22

RCCV

Answer 22

(1) 96 hours
(2) One city, municipality, or county
(3) exception for union activities

Question 23

Ice Dams

Answer 23

(1) aggregate by cause of loss
(2) time varies

Question 24

CAT Agg Basics (5)

Answer 24

(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)

Question 25

CAT Agg Limiting Factors

Answer 25

(1) Franchise Deductible
(2) PO Deductible – impacts each recovery

Question 26

Building CAT Coverage

Answer 26

(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

Question 27

Terrorism Risk Insurance Act (TRIA) – (3)

Answer 27

-Provides terrorism insurance
-Insurers keep 20% deductible
-Coverage is 85% of qualifying loss after deductible

Question 28

Florida Hurricane CAT Fund (3)

Answer 28

(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

Question 29

California Earthquake Authority

Answer 29

Writes primary EQ policies when private insurers stopped writing them

Mini policies, writes over 1M

Take up rate is still small

Question 30

ASL Basics (6)

Answer 30

(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

Question 31

2 Issues for ASL Reinsurer

Answer 31

(1) Primary Rate Adequacy
(2) Inuring Reinsurance Costs

Question 32

ASL Calculation Steps

Answer 32

(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