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Keys to strong CAT risk mgt
- Data Quality:
- Proper capturing and coding of exposure
- prevent manipulation
- Monitor exposure (agg's by zone and overall agg)
- Controls:
- Reinsurance to limit agg exposure
- CAT mgt integrated into UW process
- Exposure mgt
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Natural CAT test
- goal: how sensitive BS strength is to a 2nd CAT event
- Subtract from surplus net after-tax PML of 1st event
- Increase reinsurance recoverable by 40% of ceded pre-tax PML (gross PML - net pre-tax PML)
- Increase unpaid claims by 40% of net pre-tax PML for adverse development.
- Reduce adjusted surplus (1) by after-tax net PML of 2nd event.
- PML used:
- if major risk is hurricanes, same as 1st event (no impact on 2nd)
- if EQ, reduced to 1-in-100 year (lower chance of 2nd in same year)
- e.g. hurricane: both at 1-100; EQ: 1-250 and then 1-100
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Reason for increase freq & sev of CAT
- Frequency: Global warming / weather pattern change
- Severity: Population growth and increasing concentration in urban areas -> insurable values rising rapidly
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Factors that will impact Tolerance level on the stressed BCAT CAT analysis
- Financial flexibility: able and willing to replace lost capital immediately following an event -> greater leeway wrt. disparity in standard and stressed BCAR (e.g. subsidiary of an international group has easier access to capital vs. domestic mutual company)
- Assessment of historical volatility: in BS and operating performance (e.g. stdev of COR lower indicates stability in loss history)
- Exposure to frequency: exposure to more frequent severe events -> less tolerance in application of stress test (e.g. exposure to EQ much less frequent than tornado, so more tolerance)
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