OSFI.Eqk Flashcards
What is a broad 3-point plan for managing earthquake exposure?
Measure
Monitor
Limit earthquake exposure
Define PML (Probable Maximum Loss).
$-value of loss of a major earthquake is unlikely to exceed ($-loss expected only once-per-X-years).
Define Gross and Net PML.
Gross: AFTER deductible, BEFORE reinsurance
Net: AFTER deductible, AFTER reinsurance
What are the 5 key principles for managing earthquake exposure?
- Risk management
- Data management
- Models
- PML
- Financial resources & contingency Plan
Briefly describe the risk management key principle.
Earthquake exposure risk management policies are overseen by Senior Management.
Briefly describe the Data Management key principle.
Data required is MORE than traditional ratemaking (attention to consistency, accuracy, completeness due to uncertainty in earthquake exposure management)
Must address data Integrity, Verification, Limitations (IVL)
Briefly describe the Models key principle.
Understand assumptions, methods, limitations of earthquake models.
Briefly describe the PML (Probable Maximum Loss) key principle.
Total expected ultimate cost
Includes considerations for data quality, non-modeled exposures, model uncertainty, multi-region exposure.
Briefly describe the Financial Resources & Contingency Plan key principle.
Financial Resources: quantification of how financial resources cover PML
Contingency Plan: how to continue efficient business operations after disaster
Identify 2 items that should be documented for earthquake risk management.
- Risk appetite and risk tolerance of insurer.
2. Data management framework
Identify and briefly describe the 7 best practices for earthquake modelling.
(DAQKD-UP)
- Document use of model within risk management program
- Alternatives: explain why a particular model is used vs alternatives
- Qualified staff needed to run in-house models regularly
- Knowledge of assumptions, methods and limitations of model
- Data granularity & quality is appropriate
- Uncertainty: how it affects capital adequacy and reinsurance requirements
- PML: explain differences between models and subsequent model adjustments
Identify 2 uses of earthquake models aside from PML calculation.
- Make U/W decisions
2. Monitor exposure-accumulations
Identify 4 sound practices for earthquake model version.
- use more than 1 model
- ensure timely updates of material changes to model (within 1 year of change)
- understand assumptions, methods, limitations of vendor software for PML calculation
- if in-house PML model is used, should compare result to alternate models
Identify 3 sound practices for earthquake model validation.
- compare modeled losses with actual losses
- compare tail losses with market price for reinsurance
- use global data to supplement limited Canadian earthquake data
Identify 4 non-modeled exposures to consider when calculating PML.
- Exposure growth between date of data and relevant exposure period.
- Consider adequacy of ITV (Insurance-to-Value)
- Consider GRC (Guaranteed Replacement Cost)
- Increased seismicity after large event
Identify 4 financial resources that can be used to support the PML for an earthquake.
- Capital and surplus from B/S (max 10% of capital and surplus)
- Reinsurance for cat
- Earthquake Premium Reserve (EPR)
- Capital market financing
How might management adjust for low data quality in earthquake PML estimate?
May add a margin of safety to the PML estimate (not an excuse to ignore data quality)
Identify 2 examples of model uncertainty.
- uncertainty associated with conversion from location-specific ground motion to actual damage levels
- model assumptions are being continuously updated & refined
How might management adjust for model uncertainty in earthquake PML estimate?
May add a margin of safety to the PML estimate
Identify 2 disadvantages of using the maximum of (BC, QC) exposures for multi-region exposures.
- Understates risk for insurers with exposure in both regions
- Ignores earthquake elsewhere which could be material
How should PMLs be reported for Canadian versus foreign insurers with exposure outside Canada?
BoD and 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
Identify a restrictive condition on earthquake exposure financial resources for reinsurance coverage.
When including non-cat reinsurance must consider ‘per event’ limits and other events that may exhaust coverage.
Identify a restrictive condition on earthquake exposure financial resources for capital market financing.
OSFI prior approval is required before recognition as a financial resource (under MCT guidelines)
Identify a restrictive condition on earthquake exposure financial resources for capital & surplus.
Limited to a maximum of 10% of capital & surplus
