Catastrophe Modeling from the Reinsurance Perspective - PowerPoint PPT Presentation

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Catastrophe Modeling from the Reinsurance Perspective

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  1. Catastrophe Modeling from the Reinsurance Perspective Jim Maher, FCAS MAAA Platinum Re CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  2. Catastrophe Models • Strengths • Weaknesses • Potential for misuse • Cat Models and Portfolio Management CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  3. Cat Model Strengths • Event Set Framework • Powerful tool for portfolio management • Detailed models • Good exposure tracking tool, even if don’t like loss results • Ability to handle (re)insurance structures • Not perfect but getting better CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  4. Cat Model Weaknesses • Non-modeled perils • Brushfire, winter storm, meteor strike • Missing elements of modeled perils • Hurricane: inland flooding • Earthquake: tsunami • Non-modeled coverages • Marine: yachts, cargo CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  5. Potential for misuse of cat models • Abuse of secondary modifiers- e.g. roof tie-downs • Potential for anti-selection- run all the models and provide lowest • More anti-selection- run detailed and aggregate models and provide lowest CAS Ratemaking Seminar: REI-2 JMM 3/7/05


  6. Cat Models and Portfolio Management • Event Set framework is a powerful tool for portfolio management • Ability to model portfolio’s risk vs. return • Determine portfolio capital and allocate to individual deals CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  7. Portfolio Framework Example • Consider two countries • Oceania and Eurasia • 5 possible events for each country • Industry losses specified • Goal-determine risk vs. return for various reinsurance portfolios CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  8. Event Sets CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  9. Create a set of Simulation Years CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  10. Check against Poisson CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  11. Contracts Consider that the following contracts are available in the open market: CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  12. Calc. Contract Losses by year CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  13. Compute AAL and expected profit for each contract CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  14. Distribution of profit/(loss) CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  15. Calculate return on capital CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  16. Portfolio Effects • Now assume that the reinsurer’s portfolio consists of certain shares of these 3 contracts • Want to calculate the overall portfolio capital and • Each contract’s share of this portfolio capital CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  17. Portfolio • Consider the following portfolio: P = 20% A + 10% B + 5% C • Then consider 3 other portfolios P+0.1% A P+0.1% B P+0.1% C CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  18. Portfolio ctd. CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  19. Allocating Portfolio Capital • The portfolio capital can be allocated as follows: Cap[20%A]= 20%/0.1% * (422.89-422.02)=174 Cap[10%B]= 10%/0.1% * (422.56-422.02)= 54 Cap[5%C] = 5%/0.1% * (425.90-422.02)=194 -------------- -------- Cap[Portfolio] = 422 CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  20. Return on Allocated Capital CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  21. Tail oriented Capital Metrics • Approach also works for tail oriented capital metrics- e.g. TVAR • Define capital = 3 x TVAR (80%) CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  22. Tail oriented ROAC CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  23. Allocated Capital Calcs • As before, alloc. capital based on marginal • For example, for the 20%A contract: 450 = (793.5-791.25)/0.1% * 20% • Portfolio Cap = Sum of Alloc. Capitals • N.B. according to this capital metric, 10%B has the highest ROAC in the portfolio CAS Ratemaking Seminar: REI-2 JMM 3/7/05

  24. Summary • CAT Models provide a powerful tool for portfolio management • Can be used to derive capital for a contract within a portfolio and ROC • There is no “contract order” issue as is sometimes thought • Portfolio can then be optimized to maximize ROC CAS Ratemaking Seminar: REI-2 JMM 3/7/05