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Earthquake exposure risk management
- insurers should have a sound and comprehensive earthquake exposure risk management policy that is subject to oversight by the BoD and is implemented by senior management, including:
- risk appetite and risk tolerance
- data management practices
- exposure aggregation monitoring and reporting
- identification and estimation of PML factors
- EQ models
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Earthquake exposure data
- appropriately captured and regularly tested for consistency, accuracy, and completeness
- data integrity: obtain consistent, accurate and complete data; implement a quality control process around data collection and entry
- data verification
- data limitation: understand data limitations and level of possible errors; testing = summarize data to find bulk coding, compare year-to-year exposure changes, …
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Earthquake models
- used with a sound knowledge of their underling assumptions and methodologies, and a high degree of caution that reflects the significant uncertainty in such estimates
- document how the use of earthquake models fits within the EQ risk management process
- understand current modelling alternatives and why the model used is appropriate
- ensure there are adequately qualified staff to run models on regular basis
- have sound understanding of key assumptions and model uncertainty
- if more than one model is used, be able to explain results and key reasons for differences
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PML estimates
- properly reflect total expected ultimate cost, including considerations for data quality, non-modelled exposures, model uncertainty and exposures to multiple regions
- consider other exposure limitation techniques, such as concentration limits by geography
- consider risk characteristics such as building age, height, occupancy, geocoding, etc.
- non-modelled exposures include growth, contingent business interruption, auto and marine insurance, claims handling expenses, etc
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Available financial resources:
- capital and surplus (amount of retention used to manage EQ exposure)
- ERRO (retention, up to 10% of capital)
- documented reinsurance coverage
- capital market financing
- those resources must cover the PML
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Factors to consider in an analysis of reinsurance
- adequacy of capital base
- earnings over the last few years
- financial strength of shareholders
- length of time in business
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Regulatory reporting
- insurers are required to annually file and EQ Exposure Data form with OSFI
- insurers without material earthquake exposure should submit a letter stating this fact
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EQ reserves requirements
- ERRO = EPR + ERC = EQ reserve required by OSFI
- EPR = EQ premium reserve = voluntary accumulation of EQ premiums
- ERC = EQ reserve complement = PML250 + (N/25)(PML500 - PML250) - Retention - Reinsurance Collectable - Approved Capital Market Financing - EPR
- N = current fiscal year minus 1997
- EPRX+1 = EPRX + .75(EQ EP - Reinsurance Cost); cap at PML500(X)
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