OSFI.Eqk

Question 1

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

Answer 1

Measure
Monitor
Limit earthquake exposure

Question 2

Define PML (Probable Maximum Loss).

Answer 2

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

Question 3

Define Gross and Net PML.

Answer 3

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

Question 4

What are the 5 key principles for managing earthquake exposure?

Answer 4

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

Question 5

Briefly describe the risk management EQ key principle.

Answer 5

Insuer should establish a clear risk appetite/risk Limit subject to oversight by Board of Directors and implemented by Senior Management

Question 6

Briefly describe the Data Management EQ key principle.

Answer 6

• 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

Question 7

Briefly describe the Models EQ key principle.

Answer 7

Understand assumptions, methods, limitations of earthquake models.

Question 8

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

Answer 8

PML = Total Expected Ultimate Cost

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

Question 9

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

Answer 9

Ensure adequate level of financial resources and appropriate contingency plans to successfully manage through a major earthquake.

Financial Resources: quantification of how financial resources cover PML

Contingency Plan: how to continue efficient business operations after disaster

Question 10

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

Answer 10

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

Question 11

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

Answer 11

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

Question 12

Identify 2 uses of earthquake models aside from PML calculation.

Answer 12

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

Question 13

Identify 4 sound practices for earthquake model version.

Answer 13

• 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

Question 14

Identify 3 sound practices for earthquake model validation.

Answer 14

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

Question 15

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

Answer 15

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

Question 16

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

Answer 16

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

Question 17

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

Answer 17

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

Question 18

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

Answer 18

May add a margin of safety to the PML estimate

Question 19

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

Answer 19

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

Question 20

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

Answer 20

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

Question 21

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

Answer 21

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

Question 22

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

Answer 22

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

Question 23

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

Answer 23

Limited to a maximum of 10% of capital & surplus

Question 24

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

Answer 24

Must not exceed countrywide PML500

Question 25

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

Answer 25

* 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

Question 26

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

Answer 26

- File Earthquake Exposure Data form annually - if no material exposure then submit letter stating so

Question 27

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

Answer 27

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)

Question 28

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

Answer 28

- for reporting purposes: just submit the standard Earthquake Exposure Data form - for supervisory purposes: must submit comprehensive risk management policies

Question 29

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

Answer 29

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

Question 30

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

Answer 30

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

Question 31

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

Answer 31

- state compliance with risk management policies (except where noted) - explain calculation of PML with details of supporting financial resources

Question 32

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

Answer 32

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