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6_S24 > OSFI.Eqk > Flashcards

OSFI.Eqk Flashcards

1
Q

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

A

Measure
Monitor
Limit earthquake exposure

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2
Q

Define PML (Probable Maximum Loss).

A

$-value of loss of a major earthquake is unlikely to exceed ($-loss expected only once-per-X-years).

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3
Q

Define Gross and Net PML.

A

Gross: AFTER deductible, BEFORE reinsurance
Net: AFTER deductible, AFTER reinsurance

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4
Q

What are the 5 key principles for managing earthquake exposure?

A
  1. Risk management
  2. Data management
  3. Models
  4. PML
  5. Financial resources & contingency Plan
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5
Q

Briefly describe the risk management EQ key principle.

A

Earthquake exposure risk management policies are overseen by Senior Management.

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6
Q

Briefly describe the Data Management EQ key principle.

A
  • 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
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7
Q

Briefly describe the Models EQ key principle.

A

Understand assumptions, methods, limitations of earthquake models.

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8
Q

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

A

PML = Total Expected Ultimate Cost

Includes considerations for data quality, non-modeled exposures, model uncertainty, multi-region exposure.

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9
Q

Briefly describe the Financial Resources & Contingency Plan EQ key principle.

A

Financial Resources: quantification of how financial resources cover PML

Contingency Plan: how to continue efficient business operations after disaster

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10
Q

Identify 2 items that should be documented for earthquake risk management.

A
  1. Risk appetite and risk tolerance of insurer.
  2. Data management framework
  3. model assumptions, methods, limitations
  4. calculation of PMLs
  5. nature & adequacy of financial resources
  6. contingency plans supporting the risk
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11
Q

Identify and briefly describe the 7 best practices for earthquake modelling.
(DAQKD-UP)

A
  1. Document use of model within risk management program
  2. Alternatives: explain why a particular model is used vs alternatives
  3. Qualified staff needed to run in-house models regularly
  4. Knowledge of assumptions, methods and limitations of model
  5. Data granularity & quality is appropriate
  6. Uncertainty: how it affects capital adequacy and reinsurance requirements
  7. PML: explain differences between models and subsequent model adjustments
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12
Q

Identify 2 uses of earthquake models aside from PML calculation.

A
  1. Make U/W decisions
  2. Monitor exposure-accumulations
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13
Q

Identify 4 sound practices for earthquake model version.

A
  • 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
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14
Q

Identify 3 sound practices for earthquake model validation.

A
  • compare modeled losses with actual losses
  • compare tail losses with market price for reinsurance
  • use global data to supplement limited Canadian earthquake data
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15
Q

Identify 4 non-modeled exposures to consider when calculating PML.

A
  1. Exposure growth between date of data and relevant exposure period.
  2. Consider adequacy of ITV (Insurance-to-Value)
  3. Consider GRC (Guaranteed Replacement Cost)
  4. Increased seismicity after large event
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16
Q

Identify 4 financial resources that can be used to support the PML for an earthquake.

A
  1. Capital and surplus from B/S (max 10% of capital and surplus)
  2. Reinsurance for cat
  3. Earthquake Premium Reserve (EPR)
  4. Capital market financing
17
Q

How might management adjust for low data quality in earthquake PML estimate?

A

May add a margin of safety to the PML estimate (not an excuse to ignore data quality)

18
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
19
Q

How might management adjust for model uncertainty in earthquake PML estimate?

A

May add a margin of safety to the PML estimate

20
Q

Identify 2 disadvantages of using the maximum of (BC, QC) exposures for multi-region exposures.

A
  1. Understates risk for insurers with exposure in both regions
  2. Ignores earthquake elsewhere which could be material
21
Q

How should PMLs be reported for Canadian versus foreign insurers with exposure outside Canada?

A

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
22
Q

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

A

When including non-cat reinsurance must consider ‘per event’ limits and other events that may exhaust coverage.

23
Q

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

A

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

24
Q

Identify a restrictive condition on earthquake exposure financial resources for capital & surplus.

A

Limited to a maximum of 10% of capital & surplus

25
Q

Identify a restrictive condition on earthquake exposure financial resources for EPR.

A

Must not exceed countrywide PML500

26
Q

Briefly describe 4 practices a company should use to improve the earthquake risk estimation process and achieve strong catastrophic risk management.

A
  • Investment in technology to improve data quality
  • Auditing of data by an independent party responsible for collection and coding of data
  • Implement contingency plans to ensure claim’s handling and adequacy of staff
  • Testing the output of models with actual data
27
Q

What are the 2 OSFI’s earthquake exposure reporting requirements.

A
  • File Earthquake Exposure Data form annually
  • if no material exposure then submit letter stating so
28
Q

What are the 2 OSFI’s earthquake exposure supervisory requirements?

A

If an insurer has material earthquake exposure:

  1. Insurer must submit earthquake risk management policies
  2. Must submit FCT report that includes earthquake exposure scenario (or provide reason for not including)
29
Q

What is the difference between OSFI’s earthquake exposure reporting & supervisory requirements?

A
  • for reporting purposes: just submit the standard Earthquake Exposure Data form
  • for supervisory purposes: must submit comprehensive risk management policies
30
Q

Identify 1 OSFI’s supervisory option when an insurer’s earthquake exposure risk management principles are not being followed.

A

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

31
Q

Identify the 3 duties of senior management regarding earthquake exposure risk management.

A
  • implement risk management plan & internal controls
  • discretion to increase PML from model due to low data quality OR model uncertainty
  • report compliance and PML
32
Q

What are the 2 included items in a senior officer’s regular report to senior management regarding earthquake exposure?

A
  • state compliance with risk management policies (except where noted)
  • explain calculation of PML with details of supporting financial resources
33
Q

Identify the 2 duties of the Board of Directors regarding earthquake exposure risk management.

A
  1. Oversight of risk management plan
  2. Ensuring adequacy of internal controls
34
Q

Identify 3 ways of testing earthquake data

A
  1. Sum data by category & review stats
  2. Calculate year-over-year exposure changes
  3. Use sensitivity tests to guage materiallity level

6_S24 (56 decks)

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