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Exam 6C - Fall 2024 > OSFI.Eqk > Flashcards

OSFI.Eqk Flashcards

1
Q

What is a broad 3-point plan for managing earthquake exposure?

A

Measure / Monitor / Limit earthquake exposure

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2
Q

Define PML (Probable Maximum Loss)

A

$-value of loss a major earthquake is unlikely to exceed ($-loss expected only once per X years)

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3
Q

Define gross PML & net PML

A

Gross PML : after deductible, BEFORE reinsurance

Net PML: after deductible, AFTER reinsurance

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4
Q

Identify the key principles for managing earthquake exposure

A
  • Risk management
  • Data management
  • Models
  • PML (Probable Maximum Loss)
  • Financial Resources and Contingency Plan
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5
Q

Briefly describe the following key principle for earthquake exposure: Risk Management

A

Insurers should have a sound and comprehensive earthquake exposure risk management policy that is overseen by senior management

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6
Q

Briefly describe the following key principle for earthquake exposure: Data Management

A

Earthquake exposure data needs to be appropriately captured and regularly tested for consistency, accuracy and completeness

  • Data required is MORE than for traditional ratemaking
  • Must address data INTEGRITY, VERIFICATION, LIMITATIONS
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7
Q

Briefly describe the following key principle for earthquake exposure: Models

A

Earthquake models should be used with a sound knowledge of their underlying assumptions and methodologies, as well as a high degree of caution that reflects the significant uncertainty in such estimates

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8
Q

Briefly describe the following key principle for earthquake exposure: PML (Probable Maximum Loss)

A

PML estimates should properly reflect the total expected ultimate cost to the insurer, including considerations for data quality, non-modelled exposures, model uncertainty and exposures to multiple regions

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9
Q

Briefly describe the following key principle for earthquake exposure: Financial Resources & Contingency Plan

A

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

  • Financial resources: quantification of how financial resources cover PML
  • Contingency plan: how to continue efficient business operations after disaster
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10
Q

Identify elements that earthquake exposure risk management policies and procedures should document (4)

A
  • Risk appetite and risk tolerance of insurer
  • Identification and estimation of relevant PML factors
  • Data management practices
  • Exposure aggregation monitoring and reporting
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11
Q

Identify and briefly describe the best practices for earthquake modeling (7)

A

Docs:
- document how use of model fits within risk management program (ex: for measuring & monitoring of exposure)

Alternatives:
- Understand current modelling alternatives and why the model used is appropriate for the applicable insurance portfolio

Qualified:
- Ensure there are adequately qualified staff to appropriately run the models on a regular basis when EQK models are used in-house

Knowledge:
- Must have sound knowledge/understanding of assumptions, methods, limitations of earthquake model

Data:
- Should provide evidence to show that granularity & quality of data is appropriate

Uncertainty:
- Must understand model uncertainty and how this is addressed in determining capital adequacy

PMLs:
- if model 1 ≠ model 2 when more than 1 model is used, then must explain key reasons for differences & any subsequent model adjustments

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12
Q

Identify uses of earthquake models aside from PML calculations (2)

A
  • Make U/W decisions
  • Monitor exposure-accumulations
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13
Q

What are sound practices for earthquake model VERSION (4)

A
  • Consider use of more than 1 model to counter inherent uncertainty in models
  • Ensure timely updates of material changes to model (within 1 year of change)
  • When using vendor software to determine its PML, it is important for an insurer to understand the model, its purpose, use and limitations.
  • If in-house PML model is used, it is expected to be updated regularly and should compare result to alternate models
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14
Q

What are sound practices for earthquake model VALIDATION (4)

A
  • Compare modeled losses with actual losses (should be consistent over time)
  • Compare tail losses with market price for reinsurance (not a validation per se, but will serve as a source for further investigations)
  • The setting and refinement of model parameters, including loadings for non-modelled risks or costs, should be robust and reflect the results of the model validation process
  • Model validation process should be documented, and should clearly identify any limitations of the model or the data in assessing risk.
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15
Q

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

A

May add a margin of safety to the PML estimate (not an excuse to ignore data quality)

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16
Q

PML: identify non-modeled exposures when calculating PML (4)

A
  • Contingent business interruption
  • Consider adequacy of ITV (Insurance-to-Value)
  • Consider Guaranteed Replacement Cost (may be inadequate due to inflation)
  • Increased seismicity after large event
17
Q

PML: identify 2 examples of model uncertainty (2)

A
  • Uncertainty associated with conversion from location-specific ground motion to actual damage levels
  • Model assumptions are being continously updated & refined
18
Q

PML: regarding multi-region exposures, identify disadvantages of using the maximum of (BC, QC) exposures (2)

A
  • Understates risk for insurers with exposure in both regions
  • Ignores earthquake exposure elsewhere, which could be material
19
Q

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

A

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

20
Q

Identify financial resources for covering PML for earthquake exposure

A
  • Capital & Surplus (max 10% of capital & surplus)
  • Reinsurance (most insurers use CAT reinsurance, could also be per risk, quota share and XOL)
  • Earthquake reserves (calculated as part of MCT)
  • Capital market financing
21
Q

Identify a restrictive condition on earthquake exposure financial resources for: capital & surplus

A

Limited to a maximum of 10% of capital & surplus

22
Q

Identify a restrictive condition on earthquake exposure financial resources for: reinsurance coverage

A

When an insurer includes non-CAT reinsurance, it needs to be prepared to demonstrate that is has appropriately considered per event limits and other events, terms and conditions that would otherwise exhaust coverage

23
Q

Identify a restrictive condition on earthquake exposure financial resources for: Earthquake reserve

A

Must not exceed countrywide PML500

24
Q

Identify a restrictive condition on earthquake exposure financial resources for: capital market financing

A

OSFI prior approval is required before recognition as a financial resource under MCT guidelines

25
Q

What are OSFI’s earthquake exposure reporting requirements?

A
  • File earthquake exposure data form annually
  • If no material exposure then submit letter stating so
26
Q

What are OSFI’s earthquake supervisory requirements?

A

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)

27
Q

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

A

For reporting purposes: just submit the standard Earthquake Exposure Data form

For supervisory purposes: must submit comprehensive risk management policies

28
Q

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

A

OSFI may adjust capital or asset requirements or Target Solvency Ratio

29
Q

What are the duties of senior management regarding earthquake exposure risk management (3)

A
  • Implement risk management plan & internal controls
  • Discretion to increase PML from model (due to low data quality OR model uncertainty)
  • A senior manager reports to all senior management about compliance and the PML
30
Q

What is included in a senior officer’s regular reports to senior management regarding earthquake exposure (2)

A
  • State compliance with risk management policies (except where noted)
  • Explain calculation of PML with details of supporting financial resources
31
Q

What are the duties of the Board of Directors regarding earthquake exposure risk management (2)

A

Oversight of risk management plan & ensuring adequacy of internal controls

32
Q

Insurer quality control process around data collection and entry may include:

A
  • Scoring data quality at the time of underwriting
  • Conducting remediation of sources providing inadequate data
  • Developing & implementing safeguards to prevent data collectors from miscoding business
  • Testing the output of models with actual data
  • Investing in technology to improve data quality
33
Q

Identify four practices that a company could use to improve earthquake risk estimation process & strengthen the catastrophic risk management

A
  • Investment in technology to improve data quality
  • Use multiple models
  • Update models regularly
  • Testing the output of models with actual data
34
Q

Identify and briefly describe four considerations when evaluating PML estimates from an EQ model

A

Data quality
- Insurers should seek to understand the quality of the data used & its impact when calculating PML estimates, and as such should determine appropriate adjustments to the PML estimates to account for this.

Non-modelled Exposure
- Insurers should seek to make a list of their exposure and risk factors, and should highlight & understand exposures that are not included within the model

Model Uncertainty
- Insurer should seek to understand the inherent uncertainty in their earthquake models, and as such should determine the additional safety margins required to account for this uncertainty.

Exposure in multiple regions
- Earthquake models usually take into considerations the maximum exposure between QC and BC. Doing this practice will be disadvantageous for two reasons: does not consider the fact that the insurer may have significant risk in both reasons and therefore understates the PML, and doesn’t consider significant exposure in other regions outside of BC and QC, and as such would understate the risk.

Exam 6C - Fall 2024 (56 decks)

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