OSFI Earthquake

Question 1

What are the Key principles in developing prudent approaches to managing earthquake risk ?

Answer 1

• EQ Exposure Risk Management
• EQ Exposure Data
• EQ Models
• PML Estimates
• Financial Resources and Contingency Plans

Question 2

Describe Principle 1 : EQ Exposure Risk Management

Answer 2

Insurers should have a sound EQ risk management policy subject to oversight by the BOD and implemented by senior management.

Should include:
• Risk Appetite and Risk Tolerance
• Data Management Practices
• Exposure aggregation monitoring
• Appropriate models
• Adequacy of resources in relation to PML
• Contingency plans for claim handling

Question 3

Describe Principle 2 : EQ Exposure Data

Answer 3

Exposure data needs to be appropriately captured and regularly tested for accuracy and completeness

• Data Integrity - data quality (accuracy, completeness, and consistency) can reduce model uncertainty
• Data Verification - data needs to be appropriately captured and regularly tested
• Data Limitation - management should be aware of data limitations and account for them

Question 4

Describe Principle 3 : EQ Models

Answer 4

Should be used with sound knowledge of their assumptions and methods as well as high degree of caution that reflects significant uncertainty in estimates

Question 5

Describe Principle 4 : PML Estimates

Answer 5

Should properly reflect total expected ultimate cost to insurer, including considerations for data quality, non-modeled exposures, model uncertainty and exposures to multiple regions

Question 6

Describe Principle 5 : Financial Resources and Contingency Plans

Answer 6

Insurers need to ensure that they have an adequate level of financial resources and appropriate contingency plans to successfully manage through a major EQ.

EQ exposures should be supported by: capital and surplus, EQ reserves, Re coverage, and capital market financing

Question 7

Define Probable Maximum Loss (PML)

Answer 7

Threshold dollar value of loss above which loss caused by a major EQ are unlikely

Question 8

Define Risk Appetite

Answer 8

Total level and type of risk exposure that an insurer is willing to undertake, often a qualitative assessment

Question 9

Define Risk Tolerance

Answer 9

Specific maximum amount of risk an insurer is willing to accept for each relevant risk

Question 10

Describe EQ Regulatory Reporting as outlined in EQ Exposure Sound Practices

Answer 10

All insurers must annually file the EQ Exposure Data form with OSFI
• If an insurer does not have material EQ exposure then submit a letter stating so
• Insurers with material exposure to EQ risk are required to maintain and provide to OSFI, upon request, their policies that govern the EQ exposure risk management
• OSFI expects the DCAT will consider an EQ event
• If cies do not meet the standards in the guideline then OSFI may adjust the insurer’s capital/asset requirements or target solvency ratios

Question 11

Define PML in the context of probabilistic models

Answer 11

Dollar value of loss expected to be exceeded once in every X years

Question 12

Provide elements that a contingency plan should consider in case of a catastrophe

Answer 12

• Emergency communication
• Availability of claims personnel
• Off-site system backup
• Re records

Question 13

What are the Board of Directors responsibilities with EQ policies and risk management ?

Answer 13

• Ensuring Appropriate controls are in place to monitor the effectiveness
• Oversee the dev of EQ policies and ensuring they are correctly implemented
• Review and discuss in annual review of CAT risk Management

Question 14

Give 2 examples of how to do model validation in EQ exposures and impact on model parameters

Answer 14

• Compare the few major historical EQ events to the losses produced by similar events in the model and assess any divergences
• May consider lessons from EQ in other parts of the world.
• Compare the modelled tail losses to market prices for Re coverage. This test will serve as a source for further investigations.