CATASTROPHE RISK Supervision

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CATASTROPHE RISK- Supervision

• Caribbean Association of Insurance Supervisors
• December 5, 2008
• Nigel Davies

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Catastrophe Risk
- Number of events nearly doubled since 1980s
- Increase due to windstorm floods
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Catastrophe Risk
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Catastrophe Risk
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Catastrophe Risk
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Catastrophe Risk

• Implications for us?
• A few examples

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Capital Adequacy Catastrophe Risk
Assessed to a severity of 1 in 250 years
Aggregate exposure
Reinsurance cover

Insurer
Probable Maximum Loss
High quality, liquid capital
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Capital Adequacy Catastrophe Risk
STEP 1 Aggregate exposure to PML STEP 2
Capital and Reinsurance STEP 3 Compare
PML to Capital Reinsurance
Assessed to a severity of 1 in 250 years
Aggregate exposure
Reinsurance cover

Insurer
Probable Maximum Loss
High quality, liquid capital
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Catastrophe Risk Capad Step 1

• Aggregate Exposure PML
• Aggregate exposure sums insured on all
  catastrophe exposed policies.
• Analyze by line of business and geographical
  location
• Assumptions (usually based on catastrophe models)
  determine the likely loss under scenarios of
  different severity.
• Examples 1 in 100 year severity, 1 in 250 year
  severity.

Aggregate exposure
PML
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Catastrophe Risk Capad Step 1

• Aggregate Exposure PML
• Recording aggregate exposure insurers
  discretion on line of business analysis.
• BUT
• No common modeling criteria.
• Storm surge is accounted for by some modeling
  agencies others are confined to windstorm
  damage.
• No common measure of severity.
• 1 in 100 years?
• 1 in 250 years?
• How many times in a century does do we really get
  a 1 in 100 year hurricane season?

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Reinsurance
Modeling Severity of Loss Scenarios / Return
Periods - are they reliable?

• Do supervisors really understand
• difference between a 1 in 100 year 1 in 250
  year loss scenario?
• perils modeled by different modeling agencies?

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Reinsurance
An example of modeling agency output For the
same Caribbean insurer, using the same input,
three different agencies produced these estimates
for a 1 in 200 year loss scenario
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Catastrophe Risk Capad Step 1

• Typical PMLs
• Public Sector1
• 45 70
• for 1 in 100 year
• Private Sector
• 20 30
• for various severity levels
• 1 Details in oas.org/cdmp (Dominica, St. Kitts
  Nevis and St. Lucia)
• Also, information on CCRIF available at
  www.worldbank.org

Aggregate Exposure
PML
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Catastrophe Risk Capad Step 1

• Previously
• Flood windstorm events have doubled in number
  over last 20 years
• Economic insured losses rising very rapidly

• To understand the risks, we need
• Standard modeling criteria
• Standard severity level

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Catastrophe Risk Capad Step 2

• Capital Reinsurance
• Capital
• Sufficiency?
• Quality?
• Reinsurance
• Covers severity?
• Covers frequency?
• How much capital is exposed?

Reinsurance
Insurer
High quality, liquid capital
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Multi-line ReinsuranceAn Insurance Company Y.E.
31 March 2009
Motor XL
Catastrophe XL
7.5m xs 750k 1 Reinstatement Fire,
Homeowners, Motor, Business Interruption,
CAR-material damage
8m-
6.5m xs 1m Motor, Workers Comp, Employers
Liab, TPL, CAR Liability
7m-
6m-
5m-
500k xs 500k All lines of business
4m-
3m-
90 QS, 4m per risk limit Property, Business
Interruption, CAR-material damage
2m-
1m-
90 QS, 1m per risk limit Burglary, PA, Marine
Cargo, Fidelity
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Multi-line ReinsuranceAn Insurance Company Y.E.
31 March 2009
Motor XL
Catastrophe XL
Catastrophe Excess of Loss 2 Events 6.75
million recoverable for each event. Quota
Share 3.6 million recoverable for each
risk This is a small insurer with no gaps in
reinsurance protection, but not much capital
either.
7.5m xs 750k 1 Reinstatement Fire,
Homeowners, Motor, Business Interruption,
CAR-material damage
8m-
6.5m xs 1m Motor, Workers Comp, Employers
Liab, TPL, CAR Liability
7m-
6m-
5m-
500k xs 500k All lines of business
4m-
3m-
90 QS, 4m per risk limit Property, Business
Interruption, CAR-material damage
2m-
1m-
90 QS, 1m per risk limit Burglary, PA, Marine
Cargo, Fidelity
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Property ReinsuranceAnother Insurance Company
Y.E. March 31, 2008
US180m

• Umbrella Property Catastrophe 110m XS
• 70m Residential
• 35m Commercial
• QS Event Limits (15 Agg. Exp.)
• 1 Reinstatement

US70m
Residential XL, 65m xs 5m 1 Reinstatement
US35m
15 Max. Agg. Exp. Zone B 27.45m
Commercial XL, 30m xs 5m 1 Reinstatement
Per risk XL 7.5m XS 150k Other RI to be used
first.
US5m
US3m
75 Quota Share. 4m per risk limit, subject
to an agg. exposure limit
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Property ReinsuranceAnother Insurance Company
Y.E. March 31, 2008
Catastrophe Excess of Loss 2 Events maximum of
175 million recoverable for each event. Quota
Share 75 QS, but 1. Only 58 placed, 2.
Aggregate limits were 3 times overwritten. Gap
in reinsurance protection. Vulnerability to
attritional claims would consume capital.
US180m

• Umbrella Property Catastrophe 110m XS
• 70m Residential
• 35m Commercial
• QS Event Limits (15 Agg. Exp.)
• 1 Reinstatement

US70m
Residential XL, 65m xs 5m 1 Reinstatement
US35m
15 Max. Agg. Exp. Zone B 27.45m
Commercial XL, 30m xs 5m 1 Reinstatement
Per risk XL 7.5m XS 150k Other RI to be used
first.
US5m

Quota Share. Max of US0.79m per risk
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Catastrophe Risk

• What do these examples tell us?
• Is it mostly about reinsurance?

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Yet Another Insurance Company Y.E. March 31, 2007
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Yet Another Insurance Company Y.E. March 31, 2007

• Fixed Assets 21million
• Net Asset Value 65million
• Fixed assets are illiquid and cannot be used to
  pay any claims.
• This balance sheet is top-heavy with fixed
  assets, and the real working capital is only
  44million.
• Investment property to back catastrophe claims
  introduces CORRELATED RISK ON BOTH SIDES OF THE
  BALANCE SHEET.

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Catastrophe Risk

• What does this examples tell us?
• Asset quality leaves something to be desired!!

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Catastrophe Risk Capad Step 2
Catastrophe Excess of Loss 2 Events maximum of
175 million recoverable for each event. Quota
Share 75 QS, but 1. Only 58 placed, 2.
Aggregate limits were 4 times overwritten. Gap in
reinsurance protection. Vulnerability to
attritional claims would consume capital.

• Previously
• Catastrophe reinsurance may
• have gaps
• not cover a plausibly severe hurricane
• not cover enough hurricanes
• Working capital may be insufficient in quality
  quantity.

• Fixed Assets 21million
• Net Asset Value 65million
• Fixed assets are illiquid and cannot be used to
  pay any claims.
• This balance sheet is top-heavy with fixed
  assets, and the real working capital is only
  44million.
• Investment property to back catastrophe claims
  introduces CORRELATED RISK ON BOTH SIDES OF THE
  BALANCE SHEET.

• To understand the assets, we need
• Standard assessment of reinsurance
• Standard liquid asset definition

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Catastrophe Risk Capad Step 3
Reinsurance to cover plausibly severe loss
scenario - CONSISTENTLY ASSESSED
lt
Insurer
Probable Maximum Loss
High quality, liquid capital
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Catastrophe Risk Capad Step 4

• Planning and Executing
• Supervising

Aggregate exposure
Supervising Assumptions used to arrive at PMLs
must be translated into underwriting
guidelines Examples Number and value of
shoreline properties insured vulnerable to
storm surges. Number and value of properties in
quake zone whether they are constructed or
retro-fitted to withstand quakes. CONSISTENCY
BETWEEN PML ASSUMPTIONS UNDERWRITING GUIDELINES
test during onsite inspection.
PML
Planning
Underwriting
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Catastrophe Risk the local market
102 Non-life composites in OECS in 2002

• OECS Financial Sector.
• Now, say, 150 non-life insurers.
• Many underwrite catastrophe business in the region

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Catastrophe Risk What next?
Supervision policyholder protection can be
enhanced by adopting common standards and with
greater sharing of supervisory information. What
information?

• Have all catastrophe perils been modeled,
  considered? Wind, storm surge, flooding,
  landslide, quake
• Reasonable frequency severity? 2 or 3 events
  in a year? Severity level of 1 in 100 years, 1
  in 250 years?
• Are PMLs reasonable generally consistent with
  other insurers?
• Are PML assumptions translated into underwriting
  guidelines?
• Is capital reinsurance adequate to cover PMLs?
• Is capital quality acceptable for catastrophe
  risk?
• Is reinsurance of acceptable quality?

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Catastrophe Risk What next?

• A coordinated project to
• Standardize supervisory techniques
• Enhance exchange of information
• would address these issues for all of us
  concerned
• .Any comments?

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Thank you!