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)
Author
youngt
ID
339390
Card Set
AM Best Cat
Description
AM Best Catastrophe
Updated