OSFI.EQK Flashcards
define PML (Probable maximum loss)
value of loss a major earthquake is unlikely to exceed
Key principles for managing earthquake exposure (5)
DFMPR (DFM-pr for property)
Risk management
Data management
Models
PML
Financial Resources & Contingency plan
Briefly describe the key principle of Risk management for earthquake exposure
insurer should have a sound and comprehensive earthquake exposure risk management policy that is overseen by senior management
Identify elements that earthquake exposure risk management policies and procedures should document (4)
MIDI
- institution’s risk appetite and risk tolerance
- data management practices
- identification and estimation of relevant PML factors
- model assumptions, methods, limitations
Briefly describe the key principle of Data management for earthquake exposure
earthquake exposure data needs to be tested for consistency, accuracy and completeness
Briefly describe the key principle of Modeling for earthquake exposure
Must understand assumptions, methods, limitations of earthquake models
Identify and briefly describe the best practices for earthquake modeling (4/7 2018 spring)
DAQKD-UP
Document: document use of model within risk management program
Alternatives: explain why a particular model is used versus alternatives
Qualified: need qualified staff to run in-house models regularly
Knowledge: must have knowledge of assumptions, methods, limitations of earthquake model
Data: should provide evidence that show that granularity & quality of data is appropriate for the model
Uncertainty: must understand the impact of uncertainty on capital adequacy & reinsurance requirements
PMLs: if PLM(model 1) ≠ PML(model 2) then must explain differences & any subsequent model adjustments
Briefly describe the key principle of PML for earthquake exposure
- should properly reflect the total expected ultimate cost to the insurer
- including considerations for data quality, non-modelled exposures, model uncertainty and exposures to multiple regions
Briefly describe the key principle of Financial resources & contingency plan for earthquake exposure
insurer need to ensure that they have:
- adequate level of financial resources
- appropriate contingency plans
to successfully manage through a major earthquake
Identify 3 sound practices the following earthquake model components: model version
- use more than 1 model
- ensure timely updates of material changes to model
- if in-house PML model is used, should compare result to alternate models
Identify 3 sound practices the following earthquake model components: model validation
- compare modeled losses with actual losses
- compare tail losses with market price for reinsurance
- model validation process should be documented (and identify limitations)
Identify non-modeled exposures when calculating PML (4)
ACCI
- adequacy of insurance to value
- claims handling expenses
- contingent business interruption
- increased seismicity after a large event
Regarding multi-region exposures, identify disadvantages of using the maximum of (BC,QC) exposures (2)
- understates risk for insurers with exposures in both regions
- ignores earthquake elsewhere, which can have a material impact
Identify financial resources that can be used to support the PML for an earthquake (4)
Capital & Surplus (max 10%)
Reinsurance coverage
Earthquake premium reserves (must not exceed countrywide PML500)
Capital market financing (OSFI prior approval is required before recognition)
How should PMLs be reported for Canadian vs foreign insurers with exposure outside Canada
BoD, senior management would report PMLs to OSFI as follows:
- Canadian insurers report PMLs based on worldwide exposure
- foreign insurers report PMLs based on Canada-wide exposure
