Grossi Flashcards

1
Q

Users of CAT models

A

Insurers/reinsurers: exposure

Reinsurance brokers: risk

Capital markets: CAT bonds

Regulators

Emergency Management Agencies

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2
Q

Why regular statistical tools are inappropriate for CAT losses

A

Insufficient historical claim data

Limited data available due to changing factors

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3
Q

Modules of CAT model

A

Hazard

Inventory

Vulnerability

Loss

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4
Q

Hazard module

A

Simulates natural disasters using probabilities of different parameters

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5
Q

Inventory module

A

Contains properties at risk and their characteristics

Also called the exposure module

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6
Q

Vulnerability module

A

Estimates susceptibility to damage of each property given simulated CAT

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7
Q

Loss module

A

Quantifies direct and indirect losses of the event on each property

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8
Q

Three main parameters of a hazard module

A

Frequency

Severity

Location

These have to do with simulated events, not exposures

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9
Q

Vulnerability module appraoches to estimating damage

A

Engineering judgment (simple, but arbitrary/not easy to update)

Building response analysis (more accurate, but based on specific buildings)

Class-based BRA

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10
Q

Class-based BRA steps

A

Divide risks into different classes of buildings

Identify a typical building and analyze in detail

Evaluate building performance to get a damage ratio

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11
Q

Damage ratio

A

Ratio of repair cost to replacement cost

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12
Q

Two main approaches to determine $ loss from CAT event

A

Link event parameters directly to expected loss (cannot easily be updated to reflect new information)

First estimate physical damage from an event and use a cost analysis to translate into $

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13
Q

Occurrence Exceedance Probability

A

Probability that the loss for at least one event exceeds specified loss amount

Useful in per-occurrence excess of loss reinsurance

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14
Q

Aggregate Exceedance Probability

A

Probability that sum of all losses exceeds specified loss amount

Useful in purchansing aggregate reinsurance

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15
Q

Conditional Exceedance Probability

A

Probability that the amount on a single event exceeds a specified loss amount, given that the event occurs

Useful for setting reserves after an event occurs

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16
Q

Probable Maximum Loss

A

Largest loss likely to occur in a given period of time

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17
Q

Occurrence Exceedance Probability, formula

A

OEP(Li) = 1 - Π(1 - pj)

Sort events in decreasing order by size

18
Q

Conditional Exceedance Probability formula

A

CEP(Li) = OEP(Li) / [1 - P(no events)]

19
Q

Conditions for an insurer to be willing to provide coverage to a risk

(Conditions for a risk to be insurable)

A

Ability to identify and quantify probability of event and severity of loss

Ability to set premiums for each customer

20
Q

Considerations in setting rates for CATs

A

Regulators

Competition

Uncertainty of losses

Correlation of losses

Adverse selection

Moral hazard

Liquidity of assets

21
Q

Determining whether to provide coverage

A

As long as P(Loss > nz + A) < p1

p1 is probability of insolvency

n is the # of policies

A is the current surplus

22
Q

Risk load using standard deviation of OEP curve

A
23
Q

How CAT models help determine equitable average annual losses

A

Structure Attributes

Location Attributes

24
Q

Regulator concerns with CAT models

A

Not subject matter experts; makes it tough to evaluate

Modeling firms unwilling to share key proprietary elements

Conflict: present scientifically rational approach to quantifying risk, but may be used to justify increasing rates

25
Q

CEA formation

A

After billions of dollars of loss due to 1994 Northridge earthquake

Created in 1996 as publicly managed insurer for EQ risk in CA

26
Q

CEA constraints

A

Rates needed to be actuarially sound

If scientific information was used, it should be consistent with available data and current knowledge of scientific community

27
Q

Issues raised during CEA rate hearings

A

Earthquake recurrence rates

Assumed time independence of earthquakes

Damage estimates (based only on Northridge EQ)

Underinsurance factor (understating estimated losses)

Demand surge

Policy sublimits

Rating plan deviation (by territory)

Retrofit discount

28
Q

Open issues in using CAT models in ratemaking

A

Regulatory acceptance

Public acceptance

Actuarial acceptance

Model to model variance

29
Q

ASB requirements when using a CAT model

A

Determine appropriate reliance on experts

Have a basic understanding of the model

Evaluate appropriateness for intended application

Determine if appropriately validated

Determine appropriate use of the model

30
Q

Two types of uncertainty in CAT models

A

Aleatory

Epistemic

31
Q

Aleatory uncertainty

A

Inherent randomness associated with natural hazard events (process risk)

32
Q

Epistemic uncertainty

A

Uncertainty due to lack of knowledge of the hazard (parameter risk)

33
Q

Reasons for epistemic uncertainty

A

Limited scientific knowledge

Limited historical data

Cross-disciplinary nature of CAT models

Lack of accurate data on true market values

Limited structural testing

34
Q

Ways to quantify uncertainty

A

Logic Trees

Simulation Techniques

35
Q

Logic trees

A

Displays alternative parameter values along with associated weights

Advantages: tractability, useful tool to communicate risk

Disadvantages: weights are subjective

36
Q

Simulation techniques

A

Used to model a real system by building a model that attempts to replicate system’s behavior

37
Q

Weighting CAT models, Grossi Text

A

50% weight on middle value, 25% weight on each outside value

38
Q

Three special issues insurers need to account for in managing portfolio risk

A

Data quality

Uncertainty modeling (base loss allocation on probability distributions)

Impact of correlation

39
Q

Considerations when adding a new policy to a portfolio

A

Magnitude of risk

Correlation with existing portfolio

Highest price that risk is willing to pay

40
Q

Bottom-up approach to portfolio modeling

A

Model losses at location level

Aggregate for each policy

Aggregate for each portfolio

Aggregate across portfolio

Can also aggregate by zip or other rating variables to identify high risks

41
Q

Loss diagram

$500K deductible

20% $3M xs $2M treaty based on ground up losses

30% pro-rata treaty

A
42
Q

Critical questions concerning CAT risks

A

What is the AAL?

What is the likelihood of insolvency?