A.M. Best - Catastrophe

Question 1

Why is CAT loss a big threat to financial health?

Answer 1

CATs are significant, unexpected, rapid.

Question 2

Identify drivers for recent increase in frequency/severity of CATs.

Answer 2

Frequency: climate change
Severity: increase in population density & complexity of supply chains

Question 3

Identify Best’s expectations for insurers accepting CAT risks.

Answer 3

Insurers must demonstrate ability to:

• MANAGE CAT risk
• ABSORB potential losses

Question 4

What is a standard BCAR score?

Answer 4

A measure of an insurer’s financial strength (includes a component for catastrophes).

Question 5

What is a stressed BCAR score?

Answer 5

A score that reflects the ability of an insurer to continue operating even after a catastrophe (based on natural catastrophe stress test).

Question 6

Identify considerations adjusting an insurer’s rating based on its stressed BCAR score. (4)

Answer 6

• financial flexibility: tolerance is HIGHER if the company is willing & able to replace capital after an event
• historical volatility: tolerance is LOWER if the company has a history of volatile operating performance
• frequency of severe exposures: tolerance is LOWER if the company has multiple exposures to severe events in a single season
• risk management: tolerance is HIGHER if the company has good/experienced risk management

Question 7

Describe the elements of strong CAT risk management. (4)

Answer 7

• catastrophe modelling: parameter selection is critical, use more than one model
• data quality: need accurate property location, property coding, property value
• aggregate loss exposure: use aggregate losses as a secondary test of model
• monitoring: measure, monitor and limit exposure on a continuous basis

Question 8

What is the purpose of the AM Best natural catastrophe stress test?

Answer 8

To test financial condition of insurer after 2 major catastrophe events.

Question 9

Describe the steps in the natural catastrophe stress test. (4)

Answer 9

i) surplus - reduce reported surplus by PML (net post-tax 1-in-100 event)
ii) reinsurance - increase reinsurance recoverables by at least 40% ceded PML
iii) reserves - increase reserves by 40% of net PML
iv) optional - adjust PMLs used in CAT risk portion of standard BCAR score due to changes in reinsurance structure after 1st CAT event

Question 10

Compare and contrast the testing of CAT risk: BCAR vs DCAT

Answer 10

SIMILARITY: both test multiple events
DIFFERENCE: BCAR tests 2nd non-concurrent event