OSFI Earthquake

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  1. Earthquake exposure risk management
    • insurers should have a sound and comprehensive earthquake exposure risk management policy that is subject to oversight by the BoD and is implemented by senior management, including:
    •    risk appetite and risk tolerance
    •    data management practices
    •    exposure aggregation monitoring and reporting
    •    identification and estimation of PML factors
    •    EQ models
  2. Earthquake exposure data
    • appropriately captured and regularly tested for consistency, accuracy, and completeness
    • data integrity: obtain consistent, accurate and complete data; implement a quality control process around data collection and entry
    • data verification
    • data limitation: understand data limitations and level of possible errors; testing = summarize data to find bulk coding, compare year-to-year exposure changes, …
  3. Earthquake models
    • used with a sound knowledge of their underling assumptions and methodologies, and a high degree of caution that reflects the significant uncertainty in such estimates
    • document how the use of earthquake models fits within the EQ risk management process
    • understand current modelling alternatives and why the model used is appropriate
    • ensure there are adequately qualified staff to run models on regular basis
    • have sound understanding of key assumptions and model uncertainty
    • if more than one model is used, be able to explain results and key reasons for differences
  4. PML estimates
    • properly reflect total expected ultimate cost, including considerations for data quality, non-modelled exposures, model uncertainty and exposures to multiple regions
    • consider other exposure limitation techniques, such as concentration limits by geography
    • consider risk characteristics such as building age, height, occupancy, geocoding, etc.
    • non-modelled exposures include growth, contingent business interruption, auto and marine insurance, claims handling expenses, etc
  5. Available financial resources:
    • capital and surplus (amount of retention used to manage EQ exposure)
    • ERRO (retention, up to 10% of capital)
    • documented reinsurance coverage
    • capital market financing
    • those resources must cover the PML
  6. Factors to consider in an analysis of reinsurance
    • adequacy of capital base
    • earnings over the last few years
    • financial strength of shareholders
    • length of time in business
  7. Regulatory reporting
    • insurers are required to annually file and EQ Exposure Data form with OSFI
    • insurers without material earthquake exposure should submit a letter stating this fact
  8. EQ reserves requirements
    • ERRO = EPR + ERC = EQ reserve required by OSFI
    • EPR = EQ premium reserve = voluntary accumulation of EQ premiums
    • ERC = EQ reserve complement = PML250 + (N/25)(PML500 - PML250) - Retention - Reinsurance Collectable - Approved Capital Market Financing - EPR
    • N = current fiscal year minus 1997
    • EPRX+1 = EPRX + .75(EQ EP - Reinsurance Cost); cap at PML500(X)
Card Set:
OSFI Earthquake
2014-04-12 17:00:43
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