OSFI.Eqk

Question 1

what is a broad 3 point plan for managing earthquake exposure?

Answer 1

MML
- Measure
- Monitor
- Limit earthquake exposure

Question 2

define PML (Probable Maximum Loss)

Answer 2

dollar value of loss a major earthquake is unlikely to exceed

Question 3

define gross PML and net PML

Answer 3

Gross: PML amount after deductible but before CAT and other reinsurance protections
Net: PML amount after deductible and after CAT and other reinsurance protections

Question 4

identify the 5 key principles of managing earthquake exposure

Answer 4

MR.PDF
- Models
- Risk management
- PML
- Data management
- Financial resources & contingency plans

Question 5

describe the key principle “Risk Management” for earthquake exposure

Answer 5

earthquake exposure risk management policies are overseen by senior management

Question 6

describe the key principle “Data Management” for earthquake exposure

Answer 6

• data required is more than for traditional ratemaking
• must address data (ILV 爱LV ) integrity, limitations and verification

Question 7

describe the key principle “Modeling” for earthquake exposure

Answer 7

must understand assumptions, methods and limitations of earthquake models

Question 8

describe the key principle “PML” for earthquake exposure

Answer 8

include considerations for
- data quality
- non modeled exposure
- model uncertainty
- multi region exposure

Question 9

describe the key principle “Financial resources and contingency plan” for earthquake exposure

Answer 9

• financial resources: quantification of how financial resources cover PML
• contingency plan: to ensure continued effective business operations after disaster

Question 10

identify 2 items that should be documented for earthquake risk management

Answer 10

(2 of the following)
- risk appetite and risk tolerance of insurer
- data management framework
- model assumptions, methods, limitations
- PML calculation
- contingency plans supporting the risk

Question 11

describe and explain the best practices of earthquake modeling

Answer 11

DAQKD - UP
- Document: use of model within risk management program
- Alternatives: understand why a particular model is used vs. alternatives
- Qualified: ensure qualified staff run in-house models regularly
- Knowledge: must have knowledge about AML (Assumption, Methods, Limitations)
- Data: provide evidence to show granularity and quality of data is appropriate
- Uncertainty: understand how uncertainty affects capital adequacy and reinsurance requirements
- PML: if more than 1 model used and they produce different PMLs, be able to explain the differences & any subsequent model adjustments

Question 12

identify uses of earthquake models aside from PML calculation

Answer 12

• make UW decisions
• monitor exposure accumulations

Question 13

what are sound practices for earthquake model version?

Answer 13

• use more than 1 model
• ensure timely updates of material changes to model (within 1 year of change)
• understand AML of vendor software for PML calculation
• if in house PML model is used, should compare results to alternate models

Question 14

what are sound practices for earthquake model validation?

Answer 14

• compare modelled losses with actual losses
• compare tail losses with market price for reinsurance coverage
• use global data to supplement limited Canadian data

Question 15

PML: how might management adjust for low data quality in earthquake PML estimate?

Answer 15

may add a margin of safety to the PML estimate

Question 16

considerations regarding PML estimates

Answer 16

(e,NMD)
- data quality
- non-modelled exposures
- model uncertainty
- exposures to multiple regions

Question 17

identify non-modelled exposures when calculating PML

Answer 17

(E,GIC)
- exposure growth between date of data and relevant exposure period
- guaranteed replacement cost
- ITV adequacy
- contingent business interruption
these may be small individually, but accumulation may be significant

Question 18

identify 2 examples of model uncertainty

Answer 18

• uncertainty associated with conversion from location specific ground motion to actual damage levels
• model assumptions are being continuously updated and refined

Question 19

how might management adjust for model uncertainty in earthquake PML estimate?

Answer 19

add a margin of safety to the PML estimate

Question 20

regarding multi-region exposure, identify disadvantages of using maximum of (BC, QC) exposures

Answer 20

• understates risk of insurers with exposure in both regions
• ignores earthquake elsewhere, which could be material

Question 21

how should PMLs be reported for Canadian versus foreign insurers with exposure outside Canada?

Answer 21

BoD, 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

Question 22

identify financial resources for covering PML for earthquake exposure

Answer 22

CREC
-capital & surplus (max 10% of capital & surplus)
- reinsurance
- earthquake reserves (calculated as part of MCT)
- capital market financing (financing transaction to hedge their risk for CAT events)

Question 23

identify restrictive condition on earthquake exposure financial resources for reinsurance coverage

Answer 23

when including non-CAT reinsurance must consider “per event” limits and other events that may exhaust coverage

Question 24

identify restrictive condition on earthquake exposure financial resources for capital & surplus

Answer 24

limited to a maximum of 10% of capital & surplus

Question 25

identify restrictive condition on earthquake exposure financial resources for EPR

Answer 25

must not exceed countrywide PML500

Question 26

S2014Q16
S2017Q17

Question 27

what are OSFI’s earthquake exposure reporting requirements?

Answer 27

• file earthquake exposure data form annually
• if no material exposure, then submit a letter stating so

Question 28

what are OSFI’s earthquake exposure supervisory requirements?

Answer 28

if an insurer has material earthquake exposure,
- submit earthquake risk management policies
- submit FCT report that includes earthquake exposure scenario

Question 29

what is the difference between OSFI’s earthquake exposure (reporting & supervisory) requirements?

Answer 29

• for reporting purposes: jus submit the standard earthquake exposure data form
• for supervisory purposes: must submit comprehensive risk management policies

Question 30

what are OSFI’s supervisory options when an insurer’s earthquake exposure risk management principles are not being followed?

Answer 30

OSFI may adjust capital or asset requirements or TSR (Target Solvency Ratio)

Question 31

what are the duties of senior management regarding earthquake exposure risk management?

Answer 31

• implement risk management plan & internal control
• discretion 审慎 to increase PML from model (due to low data quality of model uncertainty)
• a senior manager reports to all senior management about compliance and the PML

Question 32

what is included in a senior officer’s regular reports to senior management regarding earthquake exposure?

Answer 32

• state compliance with risk management policies
• explain calculation of PML with details of supporting financial resources

Question 33

what are the duties of the BoD regarding earthquake exposure risk management?

Answer 33

• oversight of risk management plan
• ensure adequacy of internal controls

Question 34

ways to improve risk estimation and CAT risk management

Answer 34

• technological investment
• audit data
• ensure adequate financial resources & contingency plans
• measure/monitor/limit earthquake exposures