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Validation of Third-party Catastrophe Loss Models

Explore the myth and calculation of catastrophe losses and model validation in the insurance industry at the onset of the Fourth Industrial Revolution. Includes insight into historical data, loss modeling techniques, and model validation processes.

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Validation of Third-party Catastrophe Loss Models

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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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