OSFI Earthquake Flashcards

1
Q

What are the Key principles in developing prudent approaches to managing earthquake risk ?

A
  • EQ Exposure Risk Management
  • EQ Exposure Data
  • EQ Models
  • PML Estimates
  • Financial Resources and Contingency Plans
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2
Q

Describe Principle 1 : EQ Exposure Risk Management

A

Insurers should have a sound EQ risk management policy subject to oversight by the BOD and implemented by senior management.

Should include:
• Risk Appetite and Risk Tolerance
• Data Management Practices
• Exposure aggregation monitoring
• Appropriate models
• Adequacy of resources in relation to PML
• Contingency plans for claim handling
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3
Q

Describe Principle 2 : EQ Exposure Data

A

Exposure data needs to be appropriately captured and regularly tested for accuracy and completeness

  • Data Integrity - data quality (accuracy, completeness, and consistency) can reduce model uncertainty
  • Data Verification - data needs to be appropriately captured and regularly tested
  • Data Limitation - management should be aware of data limitations and account for them
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4
Q

Describe Principle 3 : EQ Models

A

Should be used with sound knowledge of their assumptions and methods as well as high degree of caution that reflects significant uncertainty in estimates

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5
Q

Describe Principle 4 : PML Estimates

A

Should properly reflect total expected ultimate cost to insurer, including considerations for data quality, non-modeled exposures, model uncertainty and exposures to multiple regions

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6
Q

Describe Principle 5 : Financial Resources and Contingency Plans

A

Insurers need to ensure that they have an adequate level of financial resources and appropriate contingency plans to successfully manage through a major EQ.

EQ exposures should be supported by: capital and surplus, EQ reserves, Re coverage, and capital market financing

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7
Q

Define Probable Maximum Loss (PML)

A

Threshold dollar value of loss above which loss caused by a major EQ are unlikely

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8
Q

Define Risk Appetite

A

Total level and type of risk exposure that an insurer is willing to undertake, often a qualitative assessment

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9
Q

Define Risk Tolerance

A

Specific maximum amount of risk an insurer is willing to accept for each relevant risk

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10
Q

Describe EQ Regulatory Reporting as outlined in EQ Exposure Sound Practices

A

All insurers must annually file the EQ Exposure Data form with OSFI
• If an insurer does not have material EQ exposure then submit a letter stating so
• Insurers with material exposure to EQ risk are required to maintain and provide to OSFI, upon request, their policies that govern the EQ exposure risk management
• OSFI expects the DCAT will consider an EQ event
• If cies do not meet the standards in the guideline then OSFI may adjust the insurer’s capital/asset requirements or target solvency ratios

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11
Q

Define PML in the context of probabilistic models

A

Dollar value of loss expected to be exceeded once in every X years

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12
Q

Provide elements that a contingency plan should consider in case of a catastrophe

A
  • Emergency communication
  • Availability of claims personnel
  • Off-site system backup
  • Re records
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13
Q

What are the Board of Directors responsibilities with EQ policies and risk management ?

A
  • Ensuring Appropriate controls are in place to monitor the effectiveness
  • Oversee the dev of EQ policies and ensuring they are correctly implemented
  • Review and discuss in annual review of CAT risk Management
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14
Q

Give 2 examples of how to do model validation in EQ exposures and impact on model parameters

A
  • Compare the few major historical EQ events to the losses produced by similar events in the model and assess any divergences
  • May consider lessons from EQ in other parts of the world.
  • Compare the modelled tail losses to market prices for Re coverage. This test will serve as a source for further investigations.
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