Catastrophe Modeling For Commercial Lines - Lalonde
Catastrophe Modeling For Commercial Lines - Lalonde
Catastrophe Modeling For Commercial Lines - Lalonde
Commercial Lines
David Lalonde, FCAS, FCIA, MAAA
Casualty Actuarial Society, Ratemaking and Product Management Seminar
March 12-13, 2013
Huntington Beach, CA
HAZARD
Event Intensity
Generation Calculation ENGINEERING
Damage FINANCIAL
Estimation
Contract Loss
Exposure Calculations
Information
Policy
Conditions
Earthquake:
Modeled Perils Non-Modeled Perils
• Shake • Landslide
• Fire following • Loss from levee or dam failures
• Sprinkler leakage • Fire loss following EQ due to arson
• Liquefaction • Tsunami
Modeled Coverages Non-Modeled Loss Components
• Coverage A - Dwelling • Loss adjustment expenses
• Coverage B - Other Structures • Debris removal
• Coverage C – Contents / • Hazardous waste removal
Personal Property • Loss inflation due to political
• Coverage D – Additional Living pressure
Expense / Business Interruption
In today’s increasingly
competitive market, the Catastrophe model
development & deployment deployment for
Pricing & Tier
of catastrophe models goes Structure
beyond an actuarial & Assessment Market leaders are those
statistical exercise organizations that take a
End-to-end Technology holistic approach to
catastrophe risk business catastrophe risk
Underwriting
& strategy management & intelligence &
deployment
management. A fully
integration
throughout the integrated solution that
enterprise supports the application of
catastrophe model output at
the point of decision making
Scoring engine helps bridge the gap between
implementation &
business process
the slow adopters & market
redesign leaders
• Models continue to provide an increasingly more accurate view of catastrophe risk and offer
continually expanding functionality.
• Insurers that have successfully integrated catastrophe model output into their risk
management practices are best positioned to leverage the advanced accuracy and expanded
functionality of the models.
• Accumulation/risk-aggregation management
• Manage the impact of catastrophe risk on surplus
Enterprise Risk • Communicate with ratings agencies
Management
• Identify areas to grow
based on model-based • Use models to structure
risk metrics Portfolio Reinsurance reinsurance treaties
• Perform model-based Optimization Structuring • Use models to evaluate
analyses to understand reinsurance purchases
and manage the drivers
of catastrophe risk
Range of
complexity in
the
underwriting
process
Variation of risks.
Commercial May vary by Underwriters
Data may be
Underwriting commercial policy responsibility
sparse
Source: Christensen, Kaufmann, Shih, “Innovation Killers: How Financial Tools Destroy
Your Capacity to Do New Things,” Harvard Business Review, Jan. 2008.
©2013 AIR WORLDWIDE CAS Ratemaking & Product Management Seminar 11
Understanding the Importance of
Exposure Data Quality and Robust
Financial Modeling
Perform Cat
Hazard Check
Portfolio
Obtain
Replacement Cost Management and
Determine Optimization
Pricing
• AIR’s Touchstone™ enables the underwriter to validate and fill gaps in exposure
data:
– Validate replacement value and collect data on other primary risk characteristics such
as year built, building height, etc.
– Determine appropriate construction and occupancy classes
– Identify secondary risk characteristics such as presence of a soft story
AAL
AAL 10%
10% 5%
5% 2%
2% 1%
1% .4%
0.40% .2%
0.20%
Exceedance Probability
Portfolio
Underwriting
Management
• Simple issue/decline decisions • Exposure concentration
• Pricing • Growth planning
• Policy terms • Reporting (statutory)
• Feed into rate-scoring models • Ratemaking
• Impact on loss ratios • Reinsurance
• Exposure concentration limits
Indirect BI
Utility Failure
Sub - Events
Civil Authority
Post – Repair /
Relocation
Direct BI
Repair and Reconstruction /
Relocation
Pre-Repair /
Relocation
Offices
Hospitals
300
Hotel
200
100
Office
• A site can be very large with very different industrial plants in its interior
• Examples of industrial facility classes
– Chemical plants
– Petrochemical plants
– Power generation and distribution systems
– Manufacturing plants
• In addition, plants may be comprised of many different components - each of
very different vulnerability
Analysis of a facility's
catastrophe risk exposure can Defined distribution of components – to
depend on the carrier’s more accurately reflect a facility’s
vulnerability
sophistication & experience in
underwriting industrial facilities
Industrial facility type
Cooling Plant
Towers Equipment
27% Plant
5% Tanks Equipment
17% 29%
Process Cooling
Towers Towers
20% 0%
Process
Buildings Towers Buildings
Open 12% 15% 20%
Frame Open Frame
Structures Pipe Racks Structures Pipe Racks
8% 8% 2% 2%