OSFI.Eqk Flashcards
What is a broad 3-point plan for managing earthquake exposure?
Measure
Monitor
Limit earthquake exposure
Define PML (Probable Maximum Loss).
$-value of loss of a major earthquake is unlikely to exceed ($-loss expected only once-per-X-years).
Define Gross and Net PML.
Gross: AFTER deductible, BEFORE reinsurance
Net: AFTER deductible, AFTER reinsurance
What are the 5 key principles for managing earthquake exposure?
- Risk management
- Data management
- Models
- PML
- Financial resources & contingency Plan
Briefly describe the risk management EQ key principle.
Earthquake exposure risk management policies are overseen by Senior Management.
Briefly describe the Data Management EQ key principle.
- Data required is MORE than traditional ratemaking (attention to consistency, accuracy, completeness due to uncertainty in earthquake exposure management)
- Must address data Integrity, Verification, Limitations
Briefly describe the Models EQ key principle.
Understand assumptions, methods, limitations of earthquake models.
Briefly describe the PML (Probable Maximum Loss) EQ key principle.
PML = Total Expected Ultimate Cost
Includes considerations for data quality, non-modeled exposures, model uncertainty, multi-region exposure.
Briefly describe the Financial Resources & Contingency Plan EQ key principle.
Financial Resources: quantification of how financial resources cover PML
Contingency Plan: how to continue efficient business operations after disaster
Identify 2 items that should be documented for earthquake risk management.
- Risk appetite and risk tolerance of insurer.
- Data management framework
- model assumptions, methods, limitations
- calculation of PMLs
- nature & adequacy of financial resources
- contingency plans supporting the risk
Identify and briefly describe the 7 best practices for earthquake modelling.
(DAQKD-UP)
-
Documentuse of model within risk management program -
Alternatives: explain why a particular model is used vs alternatives -
Qualifiedstaff needed to run in-house models regularly -
Knowledgeof assumptions, methods and limitations of model -
Datagranularity & quality is appropriate -
Uncertainty: how it affects capital adequacy and reinsurance requirements -
PML: explain differences between models and subsequent model adjustments
Identify 2 uses of earthquake models aside from PML calculation.
- Make U/W decisions
- Monitor exposure-accumulations
Identify 4 sound practices for earthquake model version.
- use more than 1 model
- ensure timely updates of material changes to model (within 1 year of change)
- understand assumptions, methods, limitations of vendor software for PML calculation
- if in-house PML model is used, should compare result to alternate models
Identify 3 sound practices for earthquake model validation.
- compare modeled losses with actual losses
- compare tail losses with market price for reinsurance
- use global data to supplement limited Canadian earthquake data
Identify 4 non-modeled exposures to consider when calculating PML.
- Exposure growth between date of data and relevant exposure period.
- Consider adequacy of ITV (Insurance-to-Value)
- Consider GRC (Guaranteed Replacement Cost)
- Increased seismicity after large event
Identify 4 financial resources that can be used to support the PML for an earthquake.
- Capital and surplus from B/S (max 10% of capital and surplus)
- Reinsurance for cat
- Earthquake Premium Reserve (EPR)
- Capital market financing
How might management adjust for low data quality in earthquake PML estimate?
May add a margin of safety to the PML estimate (not an excuse to ignore data quality)
Identify 2 examples of model uncertainty.
- uncertainty associated with conversion from location-specific ground motion to actual damage levels
- model assumptions are being continuously updated & refined
How might management adjust for model uncertainty in earthquake PML estimate?
May add a margin of safety to the PML estimate
Identify 2 disadvantages of using the maximum of (BC, QC) exposures for multi-region exposures.
- Understates risk for insurers with exposure in both regions
- Ignores earthquake elsewhere which could be material
How should PMLs be reported for Canadian versus foreign insurers with exposure outside Canada?
BoD and senior management would report PMLs to OSFI as follows:
- Canadian insurers report PMLs based on worldwide exposure
- foreign insurers report PMLs based on Canada-wide exposure
Identify a restrictive condition on earthquake exposure financial resources for reinsurance coverage.
When including non-cat reinsurance must consider ‘per event’ limits and other events that may exhaust coverage.
Identify a restrictive condition on earthquake exposure financial resources for capital market financing.
OSFI prior approval is required before recognition as a financial resource (under MCT guidelines)
Identify a restrictive condition on earthquake exposure financial resources for capital & surplus.
Limited to a maximum of 10% of capital & surplus
Identify a restrictive condition on earthquake exposure financial resources for EPR.
Must not exceed countrywide PML500
Briefly describe 4 practices a company should use to improve the earthquake risk estimation process and achieve strong catastrophic risk management.
- Investment in technology to improve data quality
- Auditing of data by an independent party responsible for collection and coding of data
- Implement contingency plans to ensure claim’s handling and adequacy of staff
- Testing the output of models with actual data
What are the 2 OSFI’s earthquake exposure reporting requirements.
- File Earthquake Exposure Data form annually
- if no material exposure then submit letter stating so
What are the 2 OSFI’s earthquake exposure supervisory requirements?
If an insurer has material earthquake exposure:
- Insurer must submit earthquake risk management policies
- Must submit FCT report that includes earthquake exposure scenario (or provide reason for not including)
What is the difference between OSFI’s earthquake exposure reporting & supervisory requirements?
- for reporting purposes: just submit the standard Earthquake Exposure Data form
- for supervisory purposes: must submit comprehensive risk management policies
Identify 1 OSFI’s supervisory option when an insurer’s earthquake exposure risk management principles are not being followed.
OSFI may adjust capital or asset requirements or TSR (Target Solvency Ratio)
Identify the 3 duties of senior management regarding earthquake exposure risk management.
- implement risk management plan & internal controls
- discretion to increase PML from model due to low data quality OR model uncertainty
- report compliance and PML
What are the 2 included items in a senior officer’s regular report to senior management regarding earthquake exposure?
- state compliance with risk management policies (except where noted)
- explain calculation of PML with details of supporting financial resources
Identify the 2 duties of the Board of Directors regarding earthquake exposure risk management.
- Oversight of risk management plan
- Ensuring adequacy of internal controls
Identify 3 ways of testing earthquake data
- Sum data by category & review stats
- Calculate year-over-year exposure changes
- Use sensitivity tests to guage materiallity level
