AM Best Cat

  1. Keys to strong CAT risk mgt
    1. Data Quality:
      • Proper capturing and coding of exposure
      • prevent manipulation
    2. Monitor exposure (agg's by zone and overall agg)
    3. Controls:
      • Reinsurance to limit agg exposure
      • CAT mgt integrated into UW process
      • Exposure mgt
  2. Natural CAT test
    • goal: how sensitive BS strength is to a 2nd CAT event
      1. Subtract from surplus net after-tax PML of 1st event
      2. Increase reinsurance recoverable by 40% of ceded pre-tax PML (gross PML - net pre-tax PML)
      3. Increase unpaid claims by 40% of net pre-tax PML for adverse development.
      4. Reduce adjusted surplus (1) by after-tax net PML of 2nd event.
      5. 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
  3. 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
  4. Factors that will impact Tolerance level on the stressed BCAT CAT analysis
    1. 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)
    2. Assessment of historical volatility: in BS and operating performance (e.g. stdev of COR lower indicates stability in loss history)
    3. 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)
Card Set
AM Best Cat
AM Best Catastrophe