Earthquake Exposure Sound Practices

Question 1

What are the 5 key principles for earthquake exposure sound practices?

Answer 1

1. Insurers should have a sound and comprehensive earthquake exposure risk management policy that is overseen by senior management.
2. Earthquake exposure data need to be appropriately captured and regularly tested for consistency, accuracy and completeness.
3. Earthquake models should be used with a sound knowledge of their underlying assumptions and methodologies, as well as with a high degree of caution that reflects the significant uncertainty in such estimates.
4. PML Estimates should properly reflect the total expected cost to the insurer, including consideration for data quality, non-modelled exposures, model uncertainty and exposures to multiple regions.
5. Insurers need to ensure that they have an adequate level of financial resources and appropriate contingency plans to successfully manage through a major earthquake.

Question 2

What are possible reasons to make adjustments to the results of the earthquake model?

Answer 2

Mostly for exposures that are not accounted in the model:
- For growth of exposure
- For auto and marine insurance
- For adequacy of insurance to value
- Increased seismicity after a large event

Question 3

How can we test the data and models?

Answer 3

• Summarize data
• Compare year-to-year exposure change
• Use historical losses
• Run portfolio-specific data quality sensitivity tests

Question 4

Why would senior management need to make adjustments on the quantitative results obtained from earthquake modelisation?

Answer 4

• Data is never perfect in practice, adjustments should reflect that
• Not all exposures are considered within the model
• For forseeable changes in the exposure
• There could be practical considerations for the adjustments, like a change in deductible for earthquake risks.