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Validation of third-party Catastrophe loss models Stefano Ellero

Validation of third-party Catastrophe loss models Stefano Ellero. XVII INTERNATIONAL SYMPOSIUM INSURANCE AT THE THRESHOLD OF THE FOURTH INDUSTRIAL REVOLUTION Zlatibor, hotel „Mona“, May 16-19, 2019. CAT LOSS MODELLING.

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Validation of third-party Catastrophe loss models Stefano Ellero

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  1. Validationofthird-partyCatastrophelossmodelsStefano Ellero XVII INTERNATIONAL SYMPOSIUM INSURANCE AT THE THRESHOLD OF THE FOURTH INDUSTRIAL REVOLUTION Zlatibor, hotel „Mona“, May 16-19, 2019

  2. INSURANCE AT THE THRESHOLD OF THE FOURTH INDUSTRIAL REVOLUTION

  3. CAT LOSS MODELLING • Catrisksandtheir management are a sort ofmyth…unclearcalculations, differentlanguage (Catlosses, ReturnPeriods, Aggregatevs. Occurencedistributions, SecondaryUncertainty, etc…); • Nevertheless, as foranyothertraditional business, just one info is crucial: theamountoflossesnextyear; S2 Standard Formula Internal Loss Model Third-party LossModels • TSI currentportfolio data (byCrestazones, byLoB) • TSI currentportfolio data (by: Crestazones, Construction Type, Year of Built, Type of business – RES/COM/IND, Number of storeys, Object Insured – BUILDING/CONTENTS/BI, etc.) Inforequested • Allhistoricalportfolio data (Losses, TSI, Premiums); • HistoricalcatalogueofCatevents (Nationalarchive) • Anyother Peril infotied to thehistoricalevents (EQ magnitude, Hailstonesize, etc.) • Portfoliodataset is ususallyprovided to brokers RMS, AIR, SwissRe, MunichRe, et al. Models are run • Specificcoefficients are applied to each TSI /Cresta/LoBcombination • Coefficients are providedby EIOPA • Deterministicassessmentthought as the VaR@99,5% (Return Period = 200 yrs); • E.g. Hail: • Losses/TSI  historicalDamage Ratio; • Eventcatalogue  hailstonesize + radius • CorrelationDamage Ratio vs. Hailstonesize • Hailstonesizedistribution  Identificationof RP=100/200/500/1000 • CalculationofthecorrespondingDamage Ratio • Application at thedesiredportfolio (TSI) How it works • Askfor a construction team/firm (andcrossthefingers) • Paintingthewallsandfixingminorbugs (˝it‘s done˝) • Fullrenewalalone (˝hugeeffortandenergy, excellentresult˝) Home renewal INSURANCE AT THE THRESHOLD OF THE FOURTH INDUSTRIAL REVOLUTION

  4. INSURANCE AT THE THRESHOLD OF THE FOURTH INDUSTRIAL REVOLUTION

  5. Loss Model selection – Areasofimpact • RI setting / optimization • Capitalanalysis Gross/Net • Underwriting (analysisoftheimpactof a singlerisk) INSURANCE AT THE THRESHOLD OF THE FOURTH INDUSTRIAL REVOLUTION

  6. Loss Model selection – Keydrivers to ˝validate˝it • Comparisonwith S2 Standard Formula • RoL 1% forthehighestlayerofthe RI programme • Sensitivityanalysis • (model‘sreactionchanging some inputs) • Backtesting (comparisonwith real data) • ComparisonwiththeInternal Model (existingandreliable) • … INSURANCE AT THE THRESHOLD OF THE FOURTH INDUSTRIAL REVOLUTION

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