On Your Watch
3 June 2014 | Amora Hotel Jamison Sydney
The Actuaries Institute held its first Catastrophe Risk Seminar during June. The seminar was organised as an Institute effort to help the General Insurance industry in developing its understanding of catastrophe modelling and the inherent uncertainties in those models.
Under LAGIC, Boards must have greater oversight of the catastrophe modelling results used in the catastrophe risk management process. Ultimately, Boards must be in a position to sign off on the Probable Maximum Loss (PML), which is at the heart of insurers’ catastrophe risk management frameworks.
APRA expects Boards to have a deeper understanding, than there has perhaps been in the past, of the uncertainties in the models as well as a view on whether the modelled results sufficiently capture all the insurance costs an insurer might expect from an event.
For example, not all models will allow for costs such as post event demand surge inflation (which has been a significant factor following recent events such as Hurricane Katrina and the Christchurch earthquakes). Insurers need a structured approach for a holistic assessment of their exposures. In short, Boards must be satisfied that the PMLs used in their reinsurance purchasing decisions are a reasonable representation of the actual costs they would expect to occur.
Ultimately it will come down to Appointed Actuaries and senior management of insurers to help Boards develop their understanding of the models and enhance the frameworks by which the PML is determined.
The aim of the Catastrophe Risk Seminar was to bring together a range of perspectives from both the scientific and insurance communities so that the industry can continue on its journey toward having more transparency and consistency in the catastrophe risk management process.
Speakers on the day came from a variety of disciplines, reflecting the diverse skillsets that must be brought together in the process of managing catastrophe exposures. Mark Leonard and Andy Pitman gave some scientific perspectives on the latest thinking around earthquake and weather perils in Australia. Rick Thomas provided some global perspectives on climate modelling techniques. Mark and Rick highlighted the high level of uncertainty inherent in the science, and also gave some guidance on the strengths and weaknesses of the existing scientific models.
Ben Miliauskas, Jeremy Waite and Michael Lonergan gave their perspectives as users of models for the quantification of catastrophe risk. Ben and Jeremy spoke about the various cat models in use, and specific pros and cons of the many models. Importantly, they also set out some of the questions the models can’t answer – which should serve as useful consideration points for Boards when making decisions about the PML. Michael gave an insurer perspective on using models as part of an insurer’s catastrophe risk management framework.
Ty Birkett and John Carroll spoke of the role of reinsurance in managing catastrophe risk. Andrew Huszczo spoke about how AAs can begin to step up and take on the responsibility APRA has placed upon them to review the model results, and how to go about working in areas that sit outside of the traditional skillset of actuaries.
The day was rounded out by a robust panel discussion between Ian Laughlin (APRA), and Nick Hawkins (IAG) and David Hancock (Tower NZ). Ian reiterated the expectations APRA has of insurers. David and Nick spoke on how insurers can work with their Boards to establish appropriate risk management frameworks and draw upon various sources of information and knowledge into that process – both to act as a cross check, but also to assist in developing a more rounded understanding at senior levels within organisations.
It was clear from the discussion that as much as insurers need to ensure they have a robust view of their exposures and risk concentrations, there is a lot insurers can also do to then use that information in actively managing those risks and exposures.
The day certainly gave plenty for the attendees to think about next time they review the results of their cat modelling. Importantly, the issues raised and the knowledge shared should empower AAs, Directors and management to ask the right questions (and not be afraid of asking those questions).
The industry is clearly beginning to rise to the challenge that APRA has set it. In some ways this is just the beginning of that journey, and different participants will be at different points of the journey. However, days like the Catastrophe Risk Seminar can only help the industry move along the journey path that much faster.
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by Andrew Ngai