AM Best Catastrophe

Question 1

AM Best discusses 3 items that are the keys of a strong CAT management. Provide those 3 items

Answer 1

1 - Data Quality
2 - Monitoring exposures
3 - Controls

Question 2

Briefly discuss Data Quality as a key of a strong CAT management according to AM Best

Answer 2

• Senior management’s commitment
• Proper coding of loss exposures
• Auditing of exposure coding
• Most current insurance-to-value analysis

Question 3

Provide 2 causes contributing to the increased in frequency and severity in meteorological event

Answer 3

1 - Population growth

2 - Global warming

Question 4

Briefly discuss Monitoring Exposures as a key of a strong CAT management according to AM Best

Answer 4

• One or more CAT models are used
• Aggregate loss exposure are monitored
• Monitoring of CAT exposure frequently and consistently
• Including stress test

Question 5

Briefly discuss Controls as a key of a strong catastrophe management according to AM Best

Answer 5

• CAT management is integrated into the UW process
• Specific aggregate limits are established using a reasonable and defensible basis
• Reinsurance program is based on all available tools to ensure appropriate protection
• Implements safeguards to prevent agents to discoding business (have a better classification)

Question 6

Provide examples of required items to be included in CAT modeling ? If those items are not included in the Probable Maximum Loss (PML) estimate, what will AM Best do?

Answer 6

1 - Storm surge
2 - LAE
3 - Additional living expenses
4- Demand Surge (increase in cost of repair after a large-scale disaster)

If not included, AM BEST will increase the expected loss estimate by a conservative margin for inclusion in the BCAR

Question 7

Discuss 2 abilities on which CAT risk management is evaluated which will provide the greatest amount of flexibility within AM Best Stress Test

Answer 7

1 - Ability of avoiding material loss of capital

2 - Ability to respond to a significant capital deterioration after an event

Question 8

Stress-tested BCAR score can fall to a maximum of 30 points. Provide 5 key factors on which tolerance is based

Answer 8

1 - Financial flexibility
2 - Historical volatility
3 - Exposures to multiple events in a season
4 - CAT exposure to surplus
5 - CAT risk management capabilities

Question 9

Discuss the baseline treatment of CAT in BCAR

Answer 9

Reduce surplus by the larger of: a 1-in-100-year hurricane/windstorm PML, a 1-in-250-year earthquake PML, a recent actual large loss

Question 10

Desribe the BCAR methodology for a natural CAT stress test

Answer 10

1 - Risk Adj Surplus = Surplus - NAT PML E1
2 - Adj RR = RR + 0.4(Gross L&LAE E1 - Net L&LAE E1) = RR + 0.4 Ceded L&LAE E1
3 - Adj Reserves = Reserves + 0.4 NPT L&LAE E1
4- Surplus =Risk Adj Surplus - NAT PML E2

a. When hurricanes are major risk, PML is same for 2nd event
b. When earthquakes are main exposure, 2nd event reduced to 1 in 100 year event