OSFI.Earthquake

Question 1

5 Key Earthquake Principles

Answer 1

• Risk management
  
  • should have a sound and comperhensive EQ exposure risk management policies oversight by board and implement by senior management
• EQ exposure data quality and control
  
  • ensure proper geocoding of risk and track constraction type, age of home
  • validate and assess data regularly
• EQ model
  
  • • PML estimates
  • A PML estimate should reflect the expected ultimate cost incl. data quaility, non-modeled exposure, safty margin for model uncertainty and mutli region expousre
• financial resource and contigency plan

Question 2

7 Best Practices for Earthqauke Modeling

Answer 2

1. Doc - document use of model within risk management program
2. Alternatives - explain why a particular mode is used vs alternatives
3. Qualified - need qualified staff to run in-house models regularly
4. Knowledge - must have knowledge of assumptions, methods, limitations of EQ model
5. Data - should provide evidence to show that granularity & quality of data is appropriate
6. Uncertainty - understand the impact of uncertainty on capital adequacy & reinsurance requirements
7. PMLs - if 2 models gives very different PMLs, then explain the differences and any subsequent model adjustments

Question 3

Sound Practices for EQ Model Version (4)

Answer 3

1

Question 4

Sound Practices for EQ Model Validation (4)

Answer 4

1

Question 5

Define PML Estimate

Answer 5

Total ultimate loss estimate with considerations

• data quality
• non-modeled exposure
• model uncertainty
• risk management

Question 6

4 Considerations when Evaluating PML Estimates

Answer 6

1

Question 7

Identify Non-modeled Exposures (4)

Answer 7

1

Question 8

Identify Financial Resource (4)

Answer 8

1

Question 9

Identify a restrictive condition on EQ exposure financial resource for reinsurance coverage

Answer 9

1

Question 10

OSFI’s EQ Exposure Reporting vs Supervisory Requirements

Answer 10

1

Question 11

Duty of Senior management regarding EQ exposure risk management (3)

Answer 11

1

Question 12

Duty of BoD regarding EQ exposure risk management (2)

Answer 12

1

Question 13

Define PML (Probable Maximum Loss)

Answer 13

$ value of loss that

a major earthquake is unlikely to exceed loss amount expected only once-per-X year

Gross PML - after dedctibles, before reinsurance

Net PML - after deductibles, after reinsurance