CATASTROPHE RISK- Supervision
Caribbean Association of Insurance SupervisorsDecember 5, 2008
Nigel Davies
Catastrophe Risk
- Number of events nearly doubled since 1980’s
- Increase due to windstorm & floods
Catastrophe Risk
Catastrophe Risk
Catastrophe Risk
Catastrophe Risk
Implications for us?
A few examples………………
Capital Adequacy – Catastrophe Risk
Agg
rega
te e
xpos
ure
Pro
babl
e M
axim
um
Loss
Assessed to a severity of
1 in 250 years
Reinsurance cover
High quality, liquid capital
≤ Insu
rer
Capital Adequacy – Catastrophe Risk
Agg
rega
te e
xpos
ure
Pro
babl
e M
axim
um
Loss
Assessed to a severity of
1 in 250 years
Reinsurance cover
High quality, liquid capital
≤ Insu
rer
STEP 1
Aggregate exposure to PML
STEP 2
Capital and Reinsurance
STEP 3
Compare PML to Capital & Reinsurance
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.
Ag
gre
gat
e ex
po
sure
PM
L
Catastrophe Risk – Capad Step 1
Aggregate Exposure PML
• Recording aggregate exposure – insurer’s 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?
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?
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:
Modeling AgencyHurricane
US$ million
QuakeUS$ million
RMS 229.5 62.2
EQECAT 149.7 151.2
AIR 529.9 82.8
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
Aggre
gate
Exposu
re
PM
L
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
Catastrophe Risk – Capad Step 2
Capital & Reinsurance
Capital• Sufficiency?• Quality?
Reinsurance• Covers severity?• Covers frequency?
How much capital is exposed?
High quality, liquid capital
Reinsurance
Insu
rer
Multi-line ReinsuranceAn Insurance Company Y.E. 31 March 2009
1m-
2m-
3m-
4m-
5m-
6m-
7m-
8m-
“Motor XL” “Catastrophe XL”
$6.5m xs $1m
Motor, Workers’ Comp, Employers Liab, TPL, CAR Liability
$500k xs $500k
All lines of business
90% QS, $1m per risk limit
Burglary, PA, Marine Cargo, Fidelity
$7.5m xs $750k + 1 Reinstatement
Fire, Homeowners, Motor, Business Interruption, CAR-material damage
90% QS, $4m per risk limit
Property, Business Interruption, CAR-material damage
Multi-line ReinsuranceAn Insurance Company Y.E. 31 March 2009
1m-
2m-
3m-
4m-
5m-
6m-
7m-
8m-
“Motor XL” “Catastrophe XL”
$6.5m xs $1m
Motor, Workers’ Comp, Employers Liab, TPL, CAR Liability
$500k xs $500k
All lines of business
90% QS, $1m per risk limit
Burglary, PA, Marine Cargo, Fidelity
$7.5m xs $750k + 1 Reinstatement
Fire, Homeowners, Motor, Business Interruption, CAR-material damage
90% QS, $4m per risk limit
Property, Business Interruption, CAR-material damage
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.
Property ReinsuranceAnother Insurance Company Y.E. March 31, 2008
US$5m
US$35m
US$70m
Residential XL, $65m xs $5m
& 1 Reinstatement
Commercial XL, $30m xs $5m
& 1 Reinstatement
75% Quota Share.
$4m per risk limit, & subject to an agg. exposure limit
Umbrella Property Catastrophe $110m XS:
1. $70m Residential
2. $35m Commercial
3. QS Event Limits (15% Agg. Exp.)
& 1 Reinstatement
15% Max. Agg. Exp. Zone B $27.45m
US$180m
Per risk XL $7.5m XS $150k
Other RI to be used first.
US$3m
Property ReinsuranceAnother Insurance Company Y.E. March 31, 2008
US$5m
US$35m
US$70m
Residential XL, $65m xs $5m
& 1 Reinstatement
Commercial XL, $30m xs $5m
& 1 Reinstatement
Quota Share. Max of US$0.79m per risk
Umbrella Property Catastrophe $110m XS:
1. $70m Residential
2. $35m Commercial
3. QS Event Limits (15% Agg. Exp.)
& 1 Reinstatement
15% Max. Agg. Exp. Zone B $27.45m
US$180m
Per risk XL $7.5m XS $150k
Other RI to be used first.
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. }
Catastrophe Risk
What do these examples tell us?
• Is it mostly about reinsurance?
Yet Another Insurance Company Y.E. March 31, 2007
120,952Total capital and liabilities
5,392Current liabilities
6,486Net retained profit / (loss) 4,694Taxation payable
3,223 698Trade & other payables
Dividends51,028Non-current liabilities
3,223Tax 1,790Deferred tax liability
49,238Insurance contracts liabilities
9,709Profit before tax64,532Capital & reserves
4,174Investment income 24,518Accumulated profit
26,514Reserves
5,535Underwriting result 13,500Share capital
(44,472)Equity & Liabilities
18,557Other expenses
674Int. payable & similar chg. 120,952Total Assets
13,233Commissions paid49,485Current assets
12,008Claims inc. less RI recvble. 15,556Cash & cash equivalents
952Prepymts. & other debtors
1,943Commissions received 14,902Due from related parties
48,064Premiums earned 18,075Trade & other receivables
(757)+/- in unexpired risk71,467Non-current assets
(7,572)+/- in unearned premium 50,605Investments
56,393Premiums less RI prem. 20,862Property, Plant, Equipment
Assets
$'000Income Statement$'000Balance Sheet
Yet Another Insurance Company Y.E. March 31, 2007
120,952Total capital and liabilities
5,392Current liabilities
6,486Net retained profit / (loss) 4,694Taxation payable
3,223 698Trade & other payables
Dividends51,028Non-current liabilities
3,223Tax 1,790Deferred tax liability
49,238Insurance contracts liabilities
9,709Profit before tax64,532Capital & reserves
4,174Investment income 24,518Accumulated profit
26,514Reserves
5,535Underwriting result 13,500Share capital
(44,472)Equity & Liabilities
18,557Other expenses
674Int. payable & similar chg. 120,952Total Assets
13,233Commissions paid49,485Current assets
12,008Claims inc. less RI recvble. 15,556Cash & cash equivalents
952Prepymts. & other debtors
1,943Commissions received 14,902Due from related parties
48,064Premiums earned 18,075Trade & other receivables
(757)+/- in unexpired risk71,467Non-current assets
(7,572)+/- in unearned premium 50,605Investments
56,393Premiums less RI prem. 20,862Property, Plant, Equipment
Assets
$'000Income Statement$'000Balance Sheet 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.
Catastrophe Risk
What does this examples tell us?
Asset quality leaves something to be desired!!
Catastrophe Risk – Capad Step 2
Previously:
Catastrophe reinsurance may:• have gaps• not cover a plausibly severe hurricane• not cover enough hurricanes
• Working capital may be insufficient in quality & quantity.
To understand the assets, we need:
•Standard assessment of reinsurance
•Standard liquid asset definition
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.
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.
Catastrophe Risk – Capad Step 3
Pro
bable
Maxim
um
Lo
ss
Insu
rer <Reinsurance to cover plausibly severe
loss scenario - CONSISTENTLY ASSESSED
High quality, liquid capital
Catastrophe Risk – Capad Step 4Planning and Executing
&Supervising
Ag
gre
gate
exp
osu
re
PM
L
Underwriting
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.
Planning
Catastrophe Risk – the local market
• OECS – Financial Sector.• Now, say, 150 non-life insurers.• Many underwrite catastrophe business in the region
102 Non-life &
composites in OECS in
2002
Catastrophe Risk – What next?
1. Have all catastrophe perils been modeled, considered? Wind, storm surge, flooding, landslide, quake…
2. Reasonable frequency & severity? 2 or 3 events in a year? Severity level of 1 in 100 years, 1 in 250 years?
3. Are PMLs reasonable & generally consistent with other insurers?
4. Are PML assumptions translated into underwriting guidelines?
5. Is capital & reinsurance adequate to cover PMLs?6. Is capital quality acceptable for catastrophe risk?7. Is reinsurance of acceptable quality?
Supervision & policyholder protection can be enhanced by adopting common standards and with greater sharing of
supervisory information. What information?
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?
Thank you!