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2004 Hurricane Season Recap and Observations

2004 Hurricane Season Recap and Observations. May 2005 CAS Meeting. Agenda. Section 1 2004 Hurricane Recap Section 2 Reinsurance Observations Section 3 Catastrophe Model Observations. 1. 2004 Hurricane Recap. 2004 Hurricane Season. Source: Impact Forecasting. 2.

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2004 Hurricane Season Recap and Observations

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  1. 2004 Hurricane Season Recap and Observations May 2005 CAS Meeting

  2. Agenda Section 12004 Hurricane Recap Section 2 Reinsurance Observations Section 3 Catastrophe Model Observations 1

  3. 2004 Hurricane Recap

  4. 2004 Hurricane Season Source: Impact Forecasting 2

  5. Hurricane Path Discussion 1995 - 2003 Source: Impact Forecasting 3

  6. Hurricane Path Discussion 2004 Source: Impact Forecasting 4

  7. ISO Property Claim Service Loss Estimates $Billions 5

  8. PCS Loss Estimates and Return Periods 6

  9. Florida Detail FHCF Payment threshold: $4.5 - $4.9 Billion Per Occurrence 7

  10. Catastrophe Loss as Percent of Property Premium 1992 - 2004 2004 Countrywide: 18.8% Countrywide: 27.0% 8

  11. Reinsurance Observations

  12. Reinsurance Observations • 2004 hurricane events • Excess capacity mitigated rate pressure • Did not drive reinsurance pricing • If there were unmodeled (or not well modeled) losses, experience rating influenced pricing • Reinsurers continue to • Re-evaluate degree of uncertainty around model output • Monitor Florida regulatory developments for impact on exposure to reinsurance layers (“regulatory surge”, deductible issue, FHCF structure, etc.) • Cedents are now more interested in • Understanding and reinsuring aggregate PML’s • Reducing traditional coverage restrictions (i.e. Aon’s efforts to expand hours clause, reduce co-participations, etc.) 9

  13. 2005 Reinsurance Rate and Security Observations • Reinsurer pricing models will reflect cat model changes (likely to be in 2006) • Excess capacity is driving rates down • Significant pockets of restless capital remain – and new capacity continues to arrive • Better rated Lloyd’s market is aggressive • Aon’s leadership in restructuring this market to be more transparent and efficient • Generally led pricing in early 2005 • Spiral issues have been reduced • Questions remain about long-term discipline and ongoing profitability • Cedants more focused on security quality • Especially anticipated quality following catastrophic event • Want assistance in measuring reinsurer’s capacity to respond to multiple large catastrophe events 10

  14. Catastrophe Model Observations

  15. 3 2.5 Model C 2 Model A Overestimation Model B 1.5 1 0.5 Underestimation 0 0 20 40 60 80 100 Summary of Hurricane Loss Estimates Estimated Loss / Actual Loss Event/Portfolio Data Points Hurricane Loss Estimates Based on Post Event Catastrophe Model Analysis 11

  16. Catastrophe Model Observations • Multi-model analysis provided value • Demand surge happens, based on aggregate losses • Age of building and building codes matter • More refinement is needed in commercial occupancies, e.g. golf courses • Quality, completeness and vintage of exposure data are important • Losses occur at low wind speeds • Unmodeled losses – Flood,Contingent BI, Mold, Off-Site Power interruption • Accuracy of post-event estimates vs. actual loss is not necessarily a test of accuracy of risk estimates (PML evaluation) • Review of 2004 losses still underway – changes if any to damage functions in 2006 12

  17. Anticipated Model Changes • Information still being gathered and analyzed • 2005 model updates will be adjusted for frequency and other items • Some changes will be deferred to 2006 (damage functions, etc.) • Lower return period loss estimates • Demand surge • Revised damageability ratios at lower windspeeds • Revised damageability ratios for select construction types • Year of construction • Secondary building characteristics • Upper levels of reinsurance coverage not tested • Possible lack of independence of events 13

  18. FHCF Change Legislation • FHCF Retention drop down on third largest and smaller events • Industry basis - $4.5 billion to $1.5 billion • Loss events ordered on individual company basis • Actuarial rates for CPIC in Monroe County if reasonable competition does not exist – an experiment • OIR to study standard rating territories by 1/15/2006 • OIR to study standard policy forms by 1/15/2006 • State may ask companies to report exposure and loss data for development of public hurricane model • OIR and Consumer Advocate to have access to models used in support of rate filings • More, including sinkhole provisions 14

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