# C.01.Grossi

The flashcards below were created by user Exam8 on FreezingBlue Flashcards.

1. 4 components of catastrophe models
• hazard: produces the parameters of the catastrophe
• inventory: pf info (location, construction type, age, ...)
• vulnerability: susceptibility of the properties to damage
• loss: generates \$ loss (direct & indirect)
2. Parties interested by catastrophe models
• insurer & reinsurer
• reinsurer broker (assess client risk)
• capital mkt (cat-related products)
• regulators
• emergency mgt agencies (coordinate emergency response)
3. Exceedance Probability (EP) curve
• indicates probability that a specific loss level will be surpassed during a given period
• insurers can use it to decide how much risk to transfer
4. EP formulas
• assume only 1 loss can occur annually
• EP(Li) = p(L≥Li) = 1 - p(L≤Li) = 1 - Π(1-pi)
• Average Annual Loss = AAL = ΣpiLi
5. Probable Maximum Loss (PML)
Loss associated with a given low probability level
6. Segmenting EP curve
• general case: 3 parties involved = insd (ded), insr (lim), reinsr
• each has its own EP curve allocated
• each can decide how to price, how much covg needed, ...
7. 2 criterias for an insr to provide covg
• ability to identify & quantify event prob & loss severity
• ability to set premiums for each potential customer
8. Factors to consider when determining premium
• balance btwn profitability & demand
• state regulation
• competition
• uncertainty of losses
• loss correlation
• moral hazard
9. Determining whether to provide coverage
• insr wants prob of insolvency to be less than p1
• assume each prop has prem Z, surplus A
• if p(loss > n * Z + A) < p1 we can keep growing
10. Regular statistical tools vs cat modeling
• often inappropriate
• insufficient claim data
• limited avail data usually inappropriate due to changing factors
11. Hazard model main parameters
• location
• frequency
• severity
• historic data can only be used for initial prob dist
12. Inventory model
• most of the data comes from governmt
• data includes # prop & value by LOB / Occupancy / Covg / Construction Type
• insr may incorporate more risk-specific info
• identify missing & erroneous data, test for reasonability
13. Vulnerability model
• estimate damage to properties
• engineering judgment: (+) simpler (-) arbitrary (-) hard to update
• building response analyses based on advanced engineering techniques (+) more accurate (-) inappropriate for assessment of entire pf (tailored towards specific buildg)
• tweak prev method: split pf into classes; identify typical buildg; evaluate buildg performance (damage fctn) (damage ratio = repair cost / replacement)
14. Loss model
• link parameters of the event directly into \$ (opinion based) (+) more straightforward (-) hard to update
• determine physical damage from event & use engineering to convert to \$
• finally derive insd loss considering limits / ded / coins / ...
15. 2 types of cat model uncertainty
• Aleatory: inherent randomness associated w natural hazard events. Usually reflected in prob dist
• Epistemic: due to lack of info / knowledge of hazard
• not necessary to distinguish, make sure not ignored or double counted
16. Sources of epistemic uncertainty
• limited scientific knowledge
• limited historic data
• cross-disciplinary nature of cat (seism, meteo, engineer)
• lack of data to create GIS database
• limited laboratory testing on certain types of materials
17. 2 methods to incorporate uncertainty
• logic tree: displays param or math relationship along w weights (+) tractability & usefulness to communicate risk
• simulation techniques: can be used for more complex scenarios or to derive prob dist (+) more accurate
18. Insurance vs catastrophic losses
• losses from hazards are highly correlated
• insr need to maintain sufficient liquid assets → reflect opportunity cost in P
19. 4 principles that determine whether a rate is actuarially sound, reasonable and not unfairly discriminatory
• a rate needs to be an estimate of the expected value of future costs
• a rate provides for all costs associated with the transfer of risk
• a rate provides for the cost associated w indiv risk transfer
• a rate is reasonable & not excessive, adequate, or not unfairly discriminatory if it is an actuarially sound estimate of the exp value of all future costs associated w individual risk transfer
20. Simple ratemaking model
• risk load depends on the uncertainty on AAL
21. 2 most important cat model factors to diff btwn risks
• structure attribute of a pf (inventory cpnts) determine physical performance of building
• location attribute (proximity / succeptibility to hazard)
22. Regulation & cat modeling
• can use cat modeling to help educate regulators
• regulators historically not supportive since (1) requires expertise and (2) modeling firms want to protect proprietary info
• (+) provides scientifically rational approach
• (-) can be used to justify rate increase
23. Case study: California EQ Authority (CEA)
• formed after insr concerned w EQ threatened to leave mkt
• 2 rate constraints: actuarially sound, scientific info consistent w avail geophysical data & current knowledge
24. Major issues w CEA model
• EQ recurrence rates: more than twice historical record
• uncertainty around time dependant probabilities
• damage curve based mainly on Northridge EQ
• model loss = % of bldg value → understated if val < replacmt
• diff to determine degree of demand surge
• model can't account for CEA policy features
25. Open issues on cat model
• regulatory acceptance: no technical expertise
• public acceptance: low because results in higher rates
• actuarial acceptance: lie outside of actuary's usual experise but ASB requires reliance on experts; basic understanding; determine appropriate use of model
• model to model variance: often significant btwn models
26. Pf composition
• Residential: simple structure. Covers bldg, ctnt, living exp. Insr has detailed data
• Commercial: may have several loc w high replacemt cost, need for highly detailed data
27. Factors to consider when deciding whether to add account to pf
• magnitude of the risk
• correlation w existing pf
• highest price the risk is willing to pay
• cat model = transparent method of evaluating impact of new risk
28. Cat modeling: bottom-up approach
• calculate loss for insd & insr at the location lvl
• aggregate all locations losses by policy
• aggregate all losses
• all steps based on current pf
29. 2 critical questions when facing cat risk
• what is AAL
• what's the likelihood that the insr would go insolvent → need a good model for right EP tail
30. Special issues regarding pf risk
• data quality: need to ensure it's accurate to reduce epistemic uncertainty
• uncertainty modeling: losses should not be allocated to parties based solely on exp value
• impact of correlation: impacts amt of diversification
 Author: Exam8 ID: 165934 Card Set: C.01.Grossi Updated: 2012-08-14 00:38:43 Tags: catastrophe model exceedance probability curvehazard ratemaking uncertainty Folders: Description: Catastrophe Modeling: A New Appproach to Managing Risk Show Answers: