Grossi - CAT1

Question 1

CAT models are recent tool that combine various sciences to help better quantify

Answer 1

risk posed by natural disasters such as hurricanes and EQs

Question 2

CAT models used by

Answer 2

1. insurers & reinsurers: to assess their exposure to risk
2. reinsurance brokers: to assess risk for their clients to send to reinsurers
3. capital markets: to price CAT bonds
4. regulators: to assess insurer work
5. emergency management agencies: to determine impact of actual event and coordinate emergency response to areas most likely in need

Question 3

for insurers and reinsurers that are exposed to CAT risk, the use of a CAT model helps facilitate 2 main risk management strategies:

Answer 3

1. risk reduction: primarily included non-renewing policies, limiting coverage offered, increasing deductibles, and increasing rats
2. risk transfer: primarily includes purchasing reinsurance or issuing CAT bonds

Question 4

regular statistical tools used are often inappropriate for applying to CAT losses because

Answer 4

1. there is insufficient historical claim data for CATs
2. limited data that is available is often inappropriate due to changing factors

Question 5

CAT models have 4 components

Answer 5

1. hazard module: simulates natural disasters based on probabilities of different event parameters
2. inventory module: contains properties at risk and their characteristics; exposure module
3. vulnerability module: estimates susceptibility to damage of each property given a specific simulated CAT and property info
4. loss module: quantifies the direct (physical damage) & indirect (business interruption or relocation costs) loss of event on each property

Question 6

Hazard Module has 3 main parameters

Answer 6

1. location: EQ locations depend on locations of fault or seismic zones, hurricanes are more likely to occur in certain areas
2. frequency: parameter has biggest uncertainty
3. severity: includes multiple characteristics; EQ would have depth and fault char in addition to richter scale magnitude; would also reflect upper bound on what’s possible

Question 7

historical data can be used (hazard module)

Answer 7

to generate initial probability distributions for this module but those distributions are generally refined with scientific knowledge

Question 8

when CAT model is run, hazard module

Answer 8

would simulate a large # of possible events based on probability distributions of event parameters

-for each simulated event, module would also estimate intensity of event at different specific locations

Question 9

models can estimate losses for & what this depends on

Answer 9

entire industry, single insurer’s portfolio, individual risks

-depends on inventory input into model

Question 10

for aggregate analysis of modeled regions, modelers construct

Answer 10

annually updatable databases from government and private sources that includes # of properties and their values broken down by

Zip

LOB

Coverage

Occupancy type (important for estimating contents damage

Construction type (most important variable for damageability

Question 11

for modeling individual insurer porfolios, insurers should try

Answer 11

to include more specific risk info (roof pitch, building age, etc)

the more detailed in the input, more reliable the output

Question 12

for modeling important individual buildings

Answer 12

insurer can conduct a site-specific analysis to obtain more detailed info for input into models

Question 13

Vulnerability Module

Answer 13

estimates damage to properties from simulated events

Question 14

to construct vulnerability module, there are several approaches to obtain

Answer 14

relationship between hazard and resulting damage

Question 15

opproaches to obtain relationship between hazard and resulting damage

Answer 15

1. engineering judgement: based on expert opinion
2. building response analysis: based on advanced engineering techniques
3. class-based building response analysis: modify building response analysis to make it more appropriate for portfolio risk assessment; divides risks into different classes of buildings based on building characteristics

Question 16

engineering judgement advantage and disadvantage

Answer 16

• advantage=simple
• disadvantage=arbitrary and not easy to update as new info becomes available

Question 17

building response analysis advantage and disadvantage

Answer 17

• advantage=more accurate
• disadvantage=being based on specific buildings and thus not appropriate to apply for entire portfolio of policies

Question 18

2 steps of class-based building response analysis

Answer 18

a. ID of typical buildings
- typical building from each class is analyzed in detail
b. evaluation of building performance
- for each class, relationship between intensity of force and level of expected damage of typical building is generated
- this is applied to all buildings in class
- enables generation of damage ratios; damage ratios and functions are created for each coverage
- when model is run for actual portfolio, model would look up damage ratios for each building for each simulated event in order to calculate expected damage

Question 19

damage ratios

Answer 19

ratios of repair cost to replacement cost

Question 20

Loss Module: 2 main approaches to determine monetary loss from a CAT event

Answer 20

1. link the event parameters directly to expected loss
   - primarily based on expert opinion
   - cannot be easily updated to reflect new construction techniques, building codes etc.
2. estimate physical damage from event and use cost analysis to translate this into monetary loss

Question 21

insured loss can be computed from

Answer 21

total loss by applying policy conditions