Making the Most of Catastrophe Modeling Output July 9 th, Presenter: Kirk Bitu, FCAS, MAAA, CERA, CCRA

Similar documents
Catastrophe Portfolio Management

Fundamentals of Catastrophe Modeling. CAS Ratemaking & Product Management Seminar Catastrophe Modeling Workshop March 15, 2010

P&C Reinsurance Pricing 101 Ohio Chapter IASA. Prepared by Aon Benfield Inpoint Operations

Reinsurance Pricing 101 How Reinsurance Costs Are Created November 2014

KZ-EQ RIAS Tool. Assessment of Earthquake Risk Exposure accepted by Insurance Companies in Kazakhstan. Eugene Gurenko March 7, 2010.

Contents. Introduction to Catastrophe Models and Working with their Output. Natural Hazard Risk and Cat Models Applications Practical Issues

Neil Bodoff, FCAS, MAAA CAS Annual Meeting November 16, Stanhope by Hufton + Crow

SOCIETY OF ACTUARIES Enterprise Risk Management General Insurance Extension Exam ERM-GI

Optimal Layers for Catastrophe Reinsurance

High Resolution Catastrophe Modeling using CUDA

Reinsurance Structures and Pricing Pro-Rata Treaties. Care Reinsurance Boot Camp Josh Fishman, FCAS, MAAA August 12, 2013

Models in Oasis V1.0 November 2017

2019 Ratemaking Formula Report

Strengthening FSA s Reinsurance Regulatory Capabilities: Eugene N. Gurenko Project Leader World Bank/FIRST

THE PITFALLS OF EXPOSURE RATING A PRACTITIONERS GUIDE

CL-3: Catastrophe Modeling for Commercial Lines

INSTITUTE OF ACTUARIES OF INDIA

CALIFORNIA EARTHQUAKE RISK ASSESSMENT

2018 Ratemaking Formula Report

Catastrophe Risk Modeling and Application- Risk Assessment for Taiwan Residential Earthquake Insurance Pool

Reinsurance Symposium 2016

CATASTROPHE MODELLING

2016 Bank of America Merrill Lynch Insurance Conference

Assessing the Impact of Reinsurance on Insurers Solvency under Different Regulatory Regimes

Homeowners Ratemaking Revisited

ECONOMIC CAPITAL MODELING CARe Seminar JUNE 2016

Selective Insurance Group, Inc.

CAT301 Catastrophe Management in a Time of Financial Crisis. Will Gardner Aon Re Global

CAT Pricing: Making Sense of the Alternatives Ira Robbin. CAS RPM March page 1. CAS Antitrust Notice. Disclaimers

Catastrophe Reinsurance

Article from: ARCH Proceedings

Damages of Non-Structural Components

INSTITUTE OF ACTUARIES OF INDIA

Reinsurance Optimization The Theoretical and Practical Aspects Subhash Chandra Aon Benfield

Risks. Insurance. Credit Inflation Liquidity Operational Strategic. Market. Risk Controlling Achieving Mastery over Unwanted Surprises

CARe Seminar on Reinsurance - Loss Sensitive Treaty Features. June 6, 2011 Matthew Dobrin, FCAS

An Analysis of the Market Price of Cat Bonds

Solvency II Standard Formula: Consideration of non-life reinsurance

Exposure. Estimating Exposure. Deterministic Loss Modelling. Probabilistic Loss Modelling. Exposure Management

Statistics & Flood Frequency Chapter 3. Dr. Philip B. Bedient

Institute of Actuaries of India. March 2018 Examination

Cat Modelling Real World vs. Model World

The Role of ERM in Reinsurance Decisions

Guideline. Earthquake Exposure Sound Practices. I. Purpose and Scope. No: B-9 Date: February 2013

A. Purpose and status of Information Note 2. B. Background 2. C. Applicable standards and other materials 3

INSURANCE AUSTRALIA GROUP LIMITED ( IAG ) PRESENTATION BY HEAD OF REINSURANCE TO INVESTORS

The development of complementary insurance capacity through Insurance Linked Securities (ILS)

Catastrophe Reinsurance Pricing

Nat Cat reinsurance trends in CEE. Thierry S Pelgrin, Head of Continental Europe, Sompo Canopius Re, Zurich

Selective Insurance Group, Inc.

THIS SESSION WILL USE POLLING!

INSTITUTE AND FACULTY OF ACTUARIES SUMMARY

An Actuarial Model of Excess of Policy Limits Losses

Patrik. I really like the Cape Cod method. The math is simple and you don t have to think too hard.

International Finance. What is Risk? Campbell R. Harvey. January 19, 2017

Catastrophe Exposures & Insurance Industry Catastrophe Management Practices. American Academy of Actuaries Catastrophe Management Work Group

Asset Liability Management An Integrated Approach to Managing Liquidity, Capital, and Earnings

Maiden Holdings, Ltd. Investor Presentation March 2014

Maiden Holdings, Ltd. Investor Presentation May & June 2014

Stochastic Analysis Of Long Term Multiple-Decrement Contracts

Catwalk: Simulation-Based Re-insurance Risk Modelling

Integrating Reserve Variability and ERM:

On the Cost of Financing Catastrophe Insurance. by Glenn G. Meyers, FCAS, MAAA, and John J. Kollar, FCAS, MAAA

Update on Solvency Assessment and Management ( SAM ) Presenter: Andre Jansen van Vuuren

RAA 2019: INSIGHTS GAINED FROM HURRICANE IRMA CLAIMS

Understanding and managing damage uncertainty in catastrophe models Goran Trendafiloski Adam Podlaha Chris Ewing OASIS LMF 1

Update Belinda Miller Acting General Counsel

Risk Transfer Analysis

Independent Study Project

REINSURANCE OF INSURANCE RISK

Ohio IASA. Annual Statement Update Statement Reporting Changes. Ohio IASA November 23, 2015 Connie Jasper Woodroof StoneRiver, NAIC Liaison

9/5/2013. An Approach to Modeling Pharmaceutical Liability. Casualty Loss Reserve Seminar Boston, MA September Overview.

IRDR Center of Excellence in Understanding Risk & Safety ICoE:UR&S

Risk Mitigation and the role of (re)insurance

Value at Risk. january used when assessing capital and solvency requirements and pricing risk transfer opportunities.

THE SMART WAY TO ANALYSE YOUR RISKS. DAVID STEBBING Partner, Willis Risk & Analytics

Dependence structures for a reinsurance portfolio exposed to natural catastrophe risk

- 1 - QBE UPDATES ON PORTFOLIO SIMPLIFICATION, 2019 REINSURANCE RENEWAL AND A THREE-YEAR OPERATIONAL EFFICIENCY INITIATIVE 1

Quantifying Natural Disaster Risks with Geoinformation

Revised Educational Note. Premium Liabilities. Committee on Property and Casualty Insurance Financial Reporting. March 2015.

This presentation has been prepared for the 2016 General Insurance Seminar. The Institute Council wishes it to be understood that opinions put

Joel Taylor. Matthew Nielsen. Reid Edwards

Advanced Exposure Rating Beyond the Basics

Growth and profit opportunities in P&C R/I. Jürgen Gräber, Member of the Executive Board

Catastrophe Reinsurance Risk A Unique Asset Class

Policy Statement PS24/18 Solvency II: Updates to internal model output reporting. October 2018

Towards socially responsible (re)insurance underwriting practices: readily available big data contributions to optimize catastrophe risk management

INTRODUCTION TO NATURAL HAZARD ANALYSIS

SYMONS CAPITAL MANAGEMENT

Sidoti s Seventeenth Annual Emerging Growth Conference. March 18, 2013

A.M. Best s Updated Credit Rating Methodology and Capital Model. Robert Raber Senior Financial Analyst A.M. Best Company

AIR s 2013 Global Exceedance Probability Curve. November 2013

Expected Adverse Development as a Measure of Risk Distribution

Embedded Value in Non Life Insurance a suggested approach

Farm Mutual Reinsurance

Its inclusion in this document is not intended to be an update or reaffirmation of the forward-looking information as of any later date.

Pricing Catastrophe Reinsurance With Reinstatement Provisions Using a Catastrophe Model

Probabilistic Drought Hazard and Risk Model: A contribution of the Risk Nexus Initiative

Methodology Review Seminar

by Aurélie Reacfin s.a. March 2016

Transcription:

Making the Most of Catastrophe Modeling Output July 9 th, 2012 Presenter: Kirk Bitu, FCAS, MAAA, CERA, CCRA Kirk.bitu@bmsgroup.com 1

Agenda Database Tables Exposure Loss Standard Outputs Probability of Exceedence Curves Advance Analyses Pure Premium Calculators Allocating Loss / Costs Marginal Analyses Appendix Formulas 2

Database Tables Exposure Database Portfolio Information Loss Database Link to Exposure Database Policy Information Event Loss Tables Limits EP Curves Property Details Construction Occupancy Etc Stats Address detail 3

Database Tables Model A Event Loss Table Analysis Link To Exposure Loss Perspective Event Loss Amount Std Deviation Exposure Limit / Maximum Loss Rate Exceedence Probability Curves Analysis Link To Exposure Loss Perspective EP Curve Type (AEP / OEP) Loss Amount Probablity of Exceedence Stats Analysis Link To Exposure Loss Perspective EP Curve Type Loss Amount St Deviation 4

Database Tables Model B Event Loss Table Analysis (in table name) Link To Exposure Level of Analysis (Portfolio, Location, etc.) Peril Model Year Presentation assumes 10,000 Year Event Set Event Loss Amount Ground Up Gross Net 5

Database Tables Differences Differences in Model DBs Stats and EP tables are not in Model B. Calculated from ELT Each Analysis has its own table in Model B Model B has a Year associated with each Event, Model A does not If a given Event occurs Model A has uncertainty around the amount of loss from that event. Model B does not. (Secondary Uncertainty) 6

Standard Outputs: Probability of Exceedence Probability of exceedence curves Image - http://sincedutch.wordpress.com Calculate the PML of a portfolio Determine Retention and Reinsurance needed to mitigate risk to an acceptable level Source: RMS Methodology Documentation 7

Standard Outputs: Probability of Exceedence Probability of Exceedence: The probability of exceeding a loss threshold. Return Time: The inverse of the exceedence probability. Probability Return Earthquake of Time A EP OEP Non-Exceedence (Years) (000s) (000s) 99.99% 10,000 $1,107,388 $1,104,065 99.90% 1,000 $483,791 $482,492 99.80% 500 $312,960 $312,080 99.60% 250 $144,878 $144,355 99.50% 200 $104,109 $103,711 99.00% 100 $28,352 $28,214 98.00% 50 $4,388 $4,359 96.00% 25 $290 $286 Limit (000s) Premium (000s) Risks $5,906,893 $12,778 15,500 Average Annual Loss 100 Yr PML:Premium 2.219:1 $2,123,217 2.208:1 250 Yr PML:Premium 11.338:1 11.297:1 Vulnerability (AAL per 1k TIV) 0.359 0.359 AAL to Premium 16.616% 16.616% Loss Perspectives: Ground Up Client loss to prior to any insurance Gross Estimated insurer loss after the application of insurance policy terms Net Underlying Reinsurance Estimated insurer loss after the application of policy terms and any underlying reinsurance (FAC, XPR, QS). Net Cat Estimated loss amount retained by insurer after ceding loss to the applicable cat treaties. Loss amounts associated with the respective probability of exceedence. Aggregate Exceeding Probability (AEP) Aggregated losses associated with Return Time / Probability of Exceedence. Occurrence Exceeding Probability(OEP) Largest single event for one period associated with Return Time / Probability of Exceedence. Average Annual Loss (AAL): The long term average one period loss. Risk Management Metrics: PML to Premium Ratio The number of years of Premium required to cover the Probable Maximum Loss. Vulnerability (AAL per 1k TIV) The Average Annual Loss per $1,000 of Insured Value. AAL to Premium Ratio (Loss Ratio) The Average Annual Loss as a percentage of Premium. 8

Standard Outputs: Probability of Exceedence Model A (EP table) Use Table xxxep Create Table for specified Analysis Loss Perspective EP Type (AEP / OEP) Interpolate to find Loss based on EP EP based on Loss Model A (ELT table) Used for OEP only Find CDF @ specified loss for each Event Appendix: Beta CDF Use Return Time Formula across entire event set Sum(1 (1-e^(- rate*(1-cdf)) To find Loss based on Return time use Solver or similar product. Model B Determine correct loss column (Ground Up, Gross, Net) For AEP sum losses within year to get AEP loss for year For OEP find Maximum Loss for each year Rank Losses in descending order Assume each year is 1/10000 probability Find Year / Loss associated with value. 9

Use EP Table Model A Standard Outputs: Probability of Exceedence Model A - EP Example Find the 1 in 100 0.01 Model A From EP Table find value closest to but > then.01 From EP Table find value closest to but <.01 Loss Amount Probability of Exceeding the Loss Amount Return Time 1,100,000 0.009 111.11 1,000,000 0.012 83.33 Interpolate 1,000,000 + (1,100,000-1,000,000) * (.01-.009) / (.011 -.009) 1,066,666.67 Find the Return Time for 1,066,666.66 Model A From EP Table find value closest to but > then 1,066,666.66 From EP Table find value closest to but < 1,066,666.66 Loss Amount Probability of Exceeding the Loss Amount Return Time 1,100,000 0.0090 111.11 1,000,000 0.0120 83.33 Interpolate.009 + (.012 -.009) * (1,100,000-1,066,666) / (1,100,000-1,000,000) 0.0100 100.00 10

Standard Outputs: Probability of Exceedence Model A - ELT MODEL A Using ELT Table Find CDF @ Loss Amount For Each Event Find CDF @ 2,500,000 Exposed Limit (Max Loss Amount St Deviation Loss) Rate 2,000,000 500,000 10,000,000 0.02 Use Beta Function to Find CDF Mean Damage Ratio = Loss Amount / Exposed Limit 0.2 CV = St Dev / Loss Amount 0.25 Alpha (1 - MDR) / (CV^2) - MDR 12.6 Beta Alpha * (1-MDR) / MDR 50.4 Beta CDF 0.840813 To get Return Time use formula Sum(1 / (1-e^(-rate*(1-CDF))) 11

Standard Outputs: Probability of Exceedence Model B - ELT Model B Rank the 10,000 years and apply a probability or 1/10,000 to each year Rank Year Loss 1 2345 12,000,000 2 3876 11,500,000 3 6797 10,750,000 4 2597 10,250,000 Note Model B also does not have AEP vs OEP so we need to calculate OEP Loss = Max(Loss) by Year AEP Loss = Sum(Loss) by Year Create EP table Rank EP Loss 1 0.0001 12,000,000 2 0.0002 11,500,000 3 0.0003 10,750,000 4 0.0004 10,250,000 Interpolate - The 1/5,000 return time loss is 11,500,000 12

Advanced Analyses Pure Premium Calculator Calculate the desk price for a Reinsurance Layer Find St Deviation of loss within a layer Allocating Losses / Costs Allocate losses from portfolio level to more granular level Used to allocate Reinsurance Costs / Capital to States, Business Units, LOB s, location, etc. Marginal Analyses Find the impact of adding (removing) a location, new book of business etc. to an existing portofolio. Image - http://sincedutch.wordpress.com Image - http://earthquake.usgs.gov/r esearch/structure/crust/nam. php Image http://pubs.usgs.gov/dds/dds -29/screens/006sr.jpeg Image http://depositphotos.com Source: RMS Methodology Documentation 13

Advanced Analyses: Pure Premium Calculator The AAL within the retention and retention + limit Risk factor applied to Standard deviation to get risk transfer cost Layer % Placed Limit Retention Reinstatements Pure Premium Risk Load (b) (a) (c) 1 100% 25,000 99 12,111 50% 2 100% 50,000 25,000 99 12,940 50% 3 100% 250,000 50,000 99 29,184 50% 4 100% 1,000,000 250,000 99 28,997 50% 5 100% 10,000,000 1,000,000 99 12,894 50% Standard Deviation Loaded Premium ROL Reinsurer Loss Ratio Entry Return Time Exhaustion Return Time Loss On Line 16,313 22,519 90.1% 53.8% NA 3.3 48.4% 24,044 27,735 55.5% 46.7% 3.3 5.6 25.9% 75,190 74,199 29.7% 39.3% 4.5 17.3 11.7% 144,067 112,256 11.2% 25.8% 14.3 84.2 2.9% 143,689 94,154 0.9% 13.7% 58.1 0.1% The Standard deviation of losses within the layer Estimated Deposit (or reinsurance) premium: Can be backed into from Reinsurer loss margins. = [(c) + (d) * (e)]/(1 expense fee) Reinsurance cost as a % of limit. i.e. Cost = $27,735 Limit = $50,000 RoL = $27,735/ $50,000 = 55.5% Pure Premium / Loaded Premium i.e. PP = $12,940 Cost = $27,735 RLR = $12,940 / $27,735 = 46.7% The Return times at the retention and retention + limit Pure Premiumas a % of limit. i.e. PP = 12,940 Limit = $50,000 RoL = $12,940 / $50,000 = 25.9% 14

Advanced Analyses: Pure Premium Calculator Model A (ELT table) Determine Layer size based on retention and limit Find Loss in Layer for Each Event Appendix: Beta Layer Loss Find Variance in Layer for each Event Beyond scope of presentation can be found using numerical analysis Var = E[X^2] E[X]^2 Use this relationship substituting E[X] and loss in Layer Model B Layer losses by Event Loss in Layer = Max(0,Min(Limit,Loss- Retention) Sum Losses within each year to get loss in layer by year Apply reinstatements Find Average loss and St Deviation of loss over 10,000 year Event Set 15

Advanced Analyses: Allocating Loss / Costs Pure Premium Allocation By Layer AAL Retention Below Layer 1 Layer 2 State $ % Tot $ % Tot $ % Tot $ % Tot MN $6,125,943 88.3% $4,858,725 86.6% $837,722 94.9% $429,496 96.3% WI $809,567 11.7% $748,580 13.4% $44,598 5.1% $16,389 3.7% Grand Total $6,935,510 100.0% $5,607,305 100.0% $882,320 100.0% $445,885 100.0% Deposit Premium* $1,380,000 $1,500,000 Risk Multipler 1.564 3.364 State MN WI MN WI AAL $6,125,943 $809,567 88.3% 11.7% RI Cost $2,755,111 $124,889 95.7% 4.3% 16

Advanced Analyses: Allocating Loss / Costs Model A and B (ELT table) Run model (including ELT) at granularity (policy) which is being allocated to Aggregate up losses by Event to portfolio level Appendix: Model A Rolling up ELT Get percentage of loss from each event to layer From (policy) ELT multiply Loss Amount * % of loss in layer Roll up for each (policy) to get loss in layer. Apply further calculations as need e.g. RI Cost multiplier 17

Differences between Allocating Loss vs. Marginal Analysis Domino s Pizza example Assumptions 1 st Pizza Costs $10 2 nd Pizza Costs $8 3 rd Pizza Costs $6 Assume 3 people buy 3 pizzas and find Allocated cost Find Total cost = $24 Allocate to 3 people = $8 each Order does not matter Assume 2 people plan to buy pizza then 3 rd person elects to buy pizza as well The Marginal Cost for the 3 rd person is $24 (3 pizza cost) - $18 (2 person pizza cost) = $6 While allowing the 3 rd person in for $7 would benefit everyone they are not paying their allocated share of the entire portfolio. Order Matters!! 18

Advanced Analyses: Marginal Analysis Probability Return Portfolio New Portfolio Marginal Impact of Time Book + New Book Exceedence (Years) (000s) (000s) (000s) (000s) 0.01% 10,000 $342,210 $178,060 $342,210 $0 0.10% 1,000 $241,470 $91,863 $241,470 $0 0.20% 500 $176,740 $44,800 $177,513 $773 0.40% 250 $137,141 $25,397 $140,548 $3,407 1.00% 100 $84,699 $11,835 $88,764 $4,065 2.00% 50 $57,008 $6,699 $60,467 $3,459 5.00% 20 $28,360 $3,183 $32,166 $3,806 Limit (000s) $84,345,235 $31,223,303 $115,568,538 $31,223,303 Premium (000s) $111,740 $37,713 $149,454 $37,713 Risks 105,837 38,228 144,065 38,228 Average Annual Loss $4,536,971 $1,250,326 $5,787,297 $1,250,326 19

Advanced Analyses: Marginal Analysis Model A (ELT table) Start with a Portfolio ELT Find Metrics same as in EP / Return time calculations Combine ELT s Appendix: Model A Combining ELTs Do this for each (policy) that is being analyzed Examine Key metrics to find Drivers of PML / Cost 20

Appendix Beta CDF From ELT table Loss Amount Standard Deviation = Independent Standard Deviation + Correlated Standard Deviation Exposed Limit (Max Loss) Find Alpha and Beta for Beta Function in Excel Betadist(, Alpha, Beta) = Beta CDF @ X Mean Damage Ratio = Loss Amount / Exposed Limit CV = Standard Deviation / Loss Amount Alpha = Beta = CDF for Event Loss Table * Each Event has a specific rate I associated with it 21

Appendix Beta Layer Loss Loss in Layer = Limited Expected Value @ Retention + Limit Limited Expected Value @ Retention EV (Beta X) = (EV (Beta retention + limit) EV (Beta retention) ) / Loss Amount = % of Loss in Layer Loss in Layer for Event Set From ELT table 22

Appendix Model A Rolling Up / Combining ELT From ELT table Event Id Loss Amount Standard Deviation = Independent Standard Deviation + Correlated Standard Deviation Exposed Limit (Max Loss) Adding ELT s (use same procedure to roll up granulated ELT to portfolio) For Each Event ID Loss Amount = Standard Deviation = Exposure Limit = Rate = Rate for Event (Rate is consistent for each Event) Use same procedure to remove a Location from an ELT 23

Appendix Model B Rolling UP / Combining ELT Combined ELT s based on Event ID, Year and Model Sum Loss Amounts 24