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CAS Exam 6C > OSFI - Earthquake > Flashcards

OSFI - Earthquake Flashcards

1
Q

What are the best practices for earthquake modeling? (1-4)

A
  • DOCUMENT use of the model within risk management program
  • explain why a particular model is used versus ALTERNATIVES
  • QUALIFIED STAFF needed to run in-house models regularly
  • must have KNOWLEDGE of Assumptions, Methods, Limitations of the model
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2
Q

What are the best practices for earthquake modeling? (5-7)

A
  • provide evidence to show that the granularity and quality of the DATA is appropriate
  • understand how UNCERTAINTY affects the capital adequacy and the reinsurance requirements
  • if PML(model 1) <> PML(model 2), explain the differences, and mention the subsequent model adjustments (where PML = Probable Maximum Loss)
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3
Q

What are the 5 key principles for managing earthquake exposure?

A

1) Risk management
2) Data management
3) Models
4) PML (Probable Maximum Loss)
5) Financial resources and contingency plan

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4
Q

What is the broad 3-point plan for managing earthquake exposure?

A
  • MEASURE
  • MONITOR
  • LIMIT EQ EXPOSURE
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5
Q

Briefly describe the key principle of RISK MANAGEMENT for EQ exposure.

A

EQ exposure Risk Management policies are SUBJECT TO OVERSIGHT by the Board of Directors and IMPLEMENTED by senior management.

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6
Q

Briefly describe the key principle of DATA MANAGEMENT for EQ exposure.

A
  • data required is MORE than for traditional ratemaking

- must address the INTEGRITY, VERIFICATION, LIMITATIONS

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7
Q

Briefly describe the key principle of MODELING for EQ exposure.

A

One must understand the assumptions, the methods, and the limitations of the EQ models.

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8
Q

Briefly describe the key principle of PML (Probable Maximum Loss) for EQ exposure.

A

PML = Total Expected Ultimate Cost

- includes considerations for data quality, non-modeled exposure, model uncertainty, and multi-region exposure

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9
Q

Briefly describe the key principle for FINANCIAL RESOURCES & CONTINGENCY PLAN for EQ exposure.

A
  • Financial Resources: quantification of how financial resources cover PML (Probable Maximum Loss)
  • Contingency Plan: how to continue efficient business operations after a disaster
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10
Q

Identify uses of EQ models aside from PML (probable Maximum Loss) calculation. (2)

A
  • assist in U/W decisions

- monitor exposure accumulation

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11
Q

What are sound practices for EQ model VERSION? (4)

A
  • use more that 1 model
  • ensure timely updates of material changes to the model (within 1 year of the change)
  • understand the assumptions, methods, and limitations of the vendor software for PML (Probable Maximum Loss) calculation
  • if in-house PML model is used, one should compare the results to alternate models
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12
Q

What are sound practices for EQ model VALIDATION? (3)

A
  • compare modeled losses with actual losses
  • compare tail losses with market price for reinsurance
  • use global data to supplement limited Canadian EQ data
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13
Q

How might management adjust for low data quality in an EQ PML (Probable Maximum Loss) estimate?

A

They may add a margin of safety to the PML estimate (though, this is not an excuse to ignore the data quality).

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14
Q

Identify non-modeled exposures when calculating the PML (Probable Maximum Loss). (4)

A
  • exposure growth between the date of data and the relevant exposure period
  • consider the adequacy of the ITV (Insurance-to-Value)
  • consider GRC (Guaranteed Replacement Cost), may be inadequate due to inflation
  • increased seismicity after a large event
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15
Q

Identify 2 examples of model uncertainty.

A
  • uncertainty associated with conversion from location-specific ground motion to actual damage levels
  • model assumptions are being continuously updated & refined
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16
Q

How might management adjust for model uncertainty in an EQ PML (Probable Maximum Loss) estimate?

A

They may add a margin of safety to the PML estimate.

17
Q

Regarding multi-region exposures, identify disadvantages of using the maximum of BC & QC exposures. (2)

A
  • understates the risk for insurers that have exposure in both regions
  • ignores that there could be EQs elsewhere (than BC or QC), which could be material
18
Q

How should PMLs (Probable Maximum Loss) be reported for Canadian versus foreign insurers with exposure outside the of Canada?

A

BoD (Board of Directors), Senior management would report the PMLs to OSFI as follows:

  • Canadian insurers would report PMLs based on worldwide exposure
  • foreign insurers report PMLs based on Canada-wide exposure
19
Q

Identify financial resources for covering PML for EQ exposure. (4)

A
  • capital & surplus (max of 10%)
  • reinsurance (most insurers use CAT reinsurance)
  • EQ reserves (calculated as part of MCT)
  • capital market financing
20
Q

Identify a restrictive condition on EQ exposure financial resources for: reinsurance coverage.

A

When including a non-CAT reinsurance, one must consider the ‘per event’ limits and other events exhausting the coverage.

21
Q

Identify a restrictive condition on EQ exposure financial resources for: capital market financing.

A

OSFI prior approval is required before recognition as a financial resource (under MCT guidelines).

22
Q

How is a particular insurer’s EQ risk management program failing the key principles? (3)

A PandC insurance company is exposed to EQ risk through it’s operations in BC; however, it has struggled with finding an accurate and consistent way of quantifying this risk. Several measures, including PML, have been used, but the results have varied significantly from one year to the next. This concerns senior management, as they are unsure that the company’s financial resources would be sufficient in the event of a severe EQ.

A

DATA: may be thin since Canadian EQ events are rare
MODEL: may not have sufficient understanding of the assumptions, methods and limitations of the models
PML (Probable Maximum Loss): may not be considering non-modeled exposures

23
Q

Identify ways to improve risk estimation & CAT risk management for a particular insurer? (4)

A property and casualty insurance company provides earthquake insurance to their insureds
and considers purchasing a catastrophe treaty. However, it has struggled with finding an
accurate way of quantifying earthquake risk. Earthquake simulation model results show that
the probability of a catastrophic event is extremely low.

A
  • tech investments
  • audit the data
  • ensure adequate financial resources & contingency plan
  • measure/monitor/limit EQ exposure
24
Q

What are OSFI’s EQ exposure reporting requirements?

A
  • to file an EQ Exposure Data form annually

- if no material exposure, then submit a letter stating so

25
Q

What are OSFI’s EQ exposure supervisory requirements?

A

If an insurer has material EQ exposure:

  • the insurer must submit EQ risk management policies
  • it must also submit a DCAT report that includes an EQ exposure scenario (or provide a reason for not including such a scenario)
26
Q

What is the difference between OSFI’s EQ exposure reporting and supervisory requirements?

A
  • Reporting: just submit the standard EQ Exposure Data form

- Supervisory: must submit comprehensive risk management policies

27
Q

What are OSFI’s supervisory options when an insurer’s EQ exposure risk management principles are not being followed?

A

OSFI may adjust the capital or asset requirements or the TSR (Target Solvency Ratio).

28
Q

What are the duties of senior management regarding EQ exposure risk management? (3)

A
  • implement the risk management plan and internal controls
  • discretion to increase the PML (Probable Maximum Loss) from the model due to low data quality OR model uncertainty
  • provide an annual declaration to the BoD (Board of Directors)
29
Q

What is contained in the senior management annual EQ exposure declaration to the BoD (Board of Directors)? (2)

A
  • state the status of compliance with the risk management policies (except where noted)
  • explain the calculation of the PML (Probable Maximum Loss) with details of supporting financial resources
30
Q

What are the duties of the BoD (Board of Directors) regarding EQ exposure management?

A

They are responsible for the oversight of the risk management plan & ensuring adequacy of internal controls.

CAS Exam 6C (70 decks)

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