BCAR. CAT

Question 1

why is cat loss a big threat to financial health?

Answer 1

CATs are SUR
significant, unexpected and rapid

Question 2

identify drivers for recent increase in frequency and severity of cats

Answer 2

frequency: climate change
severity: Increase in population density and complexity of supply chains

Question 3

identify Best’s expectations for insurers accepting CAT risks

Answer 3

insurers must demonstrate ability to
- manage CAT risk
- absorb potential losses

Question 4

what is a standard BCAR score?

Answer 4

a measure of an insurer’s financial strength (includes a component for CAT)

Question 5

what is a stressed BCAR score?

Answer 5

• a score that reflects the ability of an insurer to continue operating even after a CAT
• based on natural CAT stress test
  -> the standard BCAR score already has a CAT component so the stressed score measures the impact of a second CAT

Question 6

identify considerations in adjusting an insurer’s rating based on its stressed BCAR score

Answer 6

what factors are considered in determining whether to adjust an insurer’s rating based in stressed score?
FFHR

(HR needs to decide whether to adjust standard score based on stress)

• financial flexibility: tolerance is higher if the company is willing and able to replace capital after an event
• frequency of severe expos: tolerance is lower if the company has multiple exposures to severe events in a single season
• historical volatility: tolerance is lower if the company has a history of volatile operating performance
• risk management: tolerance is higher if the company has good/experienced risk management

Question 7

describe the elements of strong CAT risk management

Answer 7

AMC,D (AMC stock very strong CAT)
- Aggregate loss exposure: use aggregate loss as a secondary test of model and to consider unmodeled scenarios
- Monitoring (MML): Measure/Monitor/Limit expo on a continuous basis
- CAT modelling:
- parameter selection is critical
- use more than 1 model
- Data quality:
- accurate property location&coding
- accurate property value & ITV
- conduct site reviews
- safeguards to prevent manipulation by agent /UW

Question 8

what is the purpose of Best natural CAT stress test?

Answer 8

test financial condition of insurer after 2 major CAT events

Question 9

describe the steps in natural CAT stress test

Answer 9

1) surplus: reduce reported surplus by PML (net post tax 1 in 100 year event)
2) reinsurance: increase reinsurance recoverable by at least 40% of ceded PML
3) reserves: increase reserves by 40% of net PML
4) reinsurance structure: adjust PMLs used in CAT portion of standard BCAR scores due to changes in reinsurance structure changes after first event occurrence

Question 10

how do earthquakes impact BCAR surplus?

Answer 10

reduce reported surplus by PML (net post tax 1 in 100 year event)

Question 11

3 point plan for limiting earthquake exposure

Answer 11

MML
-measure
- monitor
- limit exposure on a continuous basis