KZ-EQ RIAS Tool Assessment of Earthquake Risk Exposure accepted by Insurance Companies in Kazakhstan Eugene Gurenko March 7, 2010 World Bank
KZ-EQ RIAS Tool: Assessment of gross and net retained EQ risk for insurance companies in Kazakhstan Tool Inputs 1. Regional EQ loss model Stochastic set of EQ event losses as [%] of SI for different geographic aggregation zones, class of business, deductible, construction type and insured interests 2. Company s SI aggregates Gross and net SI aggregates for Company s portfolio clustered according to geographic aggregation zones, class of business, deductible, construction type and insured interests 3. Company s reinsurance Parameters of company s reinsurance contracts in place 4. Reinsurers ratings Ratings of Company s Reinsurers KZ-EQ RIAS Tool Superposition of Inputs 1, 2 and 3 Quantitative assessment of EQ gross and net retained risk Quantitative assessment of credit risk from reinsurance Tool Outputs 5. Company s EQ loss model Stochastic set of company s gross and net retained EQ losses 6. Assessment of risk Quantitative assessment of gross and net retained risk : Annual expected loss PML curves for both event and annual total loss 7. SCR for credit risk Solvency Capital Requirements for credit risk from reinsurance (Solvency II, QIS5)
Tool Inputs: 1. Regional EQ Loss Model, Assessment of EQ losses as [%] of Sum Insured This model provides a stochastic set of EQ event losses for 24 geographic risk aggregation zones and different Class of Business (Commercial, Residential, Industrial), Deductibles (0%, 1%, 2%,, 10%), Construction Types (Masonry, Concrete, Reinforced Concrete, Unfired Brick, Wood), Insured Interests (Buildings, ents, Build. & ents) Model provided by SPA Risk LLS Event Freq., Magnit Loss as [%] of Sum Insured, id ude Class of Business = Com, Deductible = 10%, Constr. Type = reinforced concrete, Insured Interest = Build. &. 1. 2. 3. 4. 5. Almaty 24. Aksai Aktau Aktobe Almaty oblast Ekibastuz 1123 0.0001 7.2 0.31% 0 0 0.058% 0 0 0.05% 1124 0.0001 7.6 0 0.54% 0 0.18% 0 0 0.07% 1125 0.0001 7.4 0.22% 0 0 0 0.12% 0.17% 0
Tool Inputs: 2. Gross and Net Sum Insured Aggregates for Company s Portfolio Insurance Company reports the accepted liability for the insured portfolio Treaty Sum Insured Gross Facultative Sum Insured Gross Treaty Sum Insured Net of Proportional Reinsurance Treaty Sum Insured Protected by Risk XL Treaty Sum Insured Protected by Cat XL Facultative Sum Insured Net Sum Insured data is to be provided clustered according to geographic aggregation zones, class of business, deductibles, construction type and insured interests
Tool Inputs: 2. Gross and Net Sum Insured for Company s Portfolio For all required kinds of gross and net Sum Insured (cf. previous slide), the data is organised in the same format per Class of Business and Deductible Example: Treaty SI Gross, Class of Business = COM, Deductible = 10% Risk accumulation by City 1. Aksai Masonry Build.. Build & Concrete Build.. Build & Total Sums Insured, KZT M Reinforced concrete Build.. Build & Unfired brick Wood Total Build.. Build & Build.. Build & Build.. Build & 2. Aktau 200 3. Aktobe 3,000 4. Almaty 400,000 24. Ekibastuz 800,000 Similar tables will need to be provided for other Classes of Business and Deductibles (if any) as well as for other kinds of SI to be reported (Facultative SI Gross, Treaty SI Net of Prop. RI, Treaty SI Protected by Risk XL, Treaty SI Protected by Cat XL, Facultative SI Net)
Tool Inputs: 3. Reinsurance (Treaty), Two different options Option 1. Proportional on gross and Cat XL on net Gross Prop. cession QS / SP on gross Event loss retained under QS/SP Cat XL on net Retention under Cat XL Cedant s net retained Option 2. Risk XL on gross and Cat XL on net Gross Large loss Risk XL on gross Event loss retained under Risk XL Cat XL on net Retention under Cat XL Cedant s net retained
Tool Inputs: 3. Reinsurance (Treaty) Parameters of XL treaties will be provided in data files Layer Cover, KZT M Priority, KZT M ROL (%) Reinstatements (#) Layer I 1,900 100 1 Layer II 3,000 2,000 1 Layer III 5,000 5,000 1 Layer IV Layer V Layer VI Layer VII Total
Tool Inputs: 4. Reinsurers Ratings Reinsurance premium split by ratings of company s reinsurers Ceded premium, KZT M Total 10 To reinsurers with S&P Rating AAA AA 5 A BBB BB 5 B CCC Not rated
Tool Outputs: 5. Company s EQ Loss Model This model provides a stochastic set of Company s gross and net EQ event losses Event Freq. Magnit Company s Gross Loss, KZT M id ude 1. 2. 3. 4. 5. Almaty 24. Total Aksai Aktau Aktobe Almaty oblast Ekibastuz 1123 0.0001 7.2 10,000 0 0 5,000 0 12,000 200,000 1124 0.0001 7.6 0 15,000 0 0 0 13,000 250,000 1125 0.0001 7.4 20,000 0 0 3,000 4,000 14,000 300,000
Tool Outputs: 6. Assessment of Gross and Net Retained EQ Exposure Deriving of loss frequency and loss severity distributions for company s gross and net retained loss based on the stochastic event sets Monte Carlos Simulation (up to 65,536 simulation runs) for obtaining Annual Expected Losses and PML curves: gross and net retained event loss (OEP) and total annual loss (AEP) AEL Gross AEL Net Mean NoGrossClaims p.a. Mean NoNetClaims p.a. 10,815 10,437 0.0755 0.0755 Return period Gross AEP Curve Gross OEP Curve Net AEP Curve Net OEP Curve 10 0 0 0 0 20 4,345 4,289 3,810 3,793 30 202,444 202,331 194,532 194,423 40 225,139 224,673 216,561 216,112 50 238,817 238,652 229,838 229,676 60 247,937 247,056 238,690 237,834 70 252,798 252,155 243,409 242,785.. 400 303,758 296,184 292,891 285,537 500 305,249 300,351 294,215 289,583 600 307,409 302,077 295,674 291,259 700 308,386 303,758 297,386 292,891 800 309,963 304,233 298,917 293,366 900 312,963 305,249 301,836 293,456 1000 350,059 305,249 335,823 294,215
Tool Outputs: 7. Solvency Capital Requirements for Credit Risk from Reinsurance (Solvency II, QIS5) A. Recoverables = Expected loss ceded to RI B. Risk Mitigation = SCR_gross - SCR_net = ("200 yrs p.a. loss gross" - "annual expected loss gross") - ("200 yrs p.a. loss net" - "annual expected loss net") C. Recovery Rate (RR) = 50% D. Loss Given Default (LGD) = (1-RR) * (Recoverables + Risk Mitigation) SCR = function (LGD, Probability of default) SCR Credit Risk 1,441 Ceded premium Probability of default Shares A. Recoverables B. Risk Mitigation C. Recovery Rate D. LGD Total 10 100% 378 10,097 50.0% To reinsurers with S&P Rating AAA 0.002% 0% 0 0 50.0% 0 AA 5 0.010% 50% 189 5,048 50.0% 2,618 A 0.050% 0% 0 0 50.0% 0 BBB 0.240% 0% 0 0 50.0% 0 BB 5 1.200% 50% 189 5,048 50.0% 2,618 B 6.040% 0% 0 0 50.0% 0 CCC 30.410% 0% 0 0 50.0% 0 Not rated 10.000% 0% 0 0 50.0% 0