2002 Casualty Actuaries in Reinsurance (CARe)

Limited Attendance Seminar on Catastrophe Pricing and Risk Management

February 28, 2002
The Roosevelt Hotel
Madison Avenue at 45th Street
New York, New York 10017
212-661-9600

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List of Attendees

Worldwide insurance losses associated with natural catastrophes more than tripled in the 1990's as compared to the 1980's, after doubling in the 1980's, as compared to the 1970's (1). As a result, insurers and reinsurers have greatly increased their efforts in the areas of catastrophe risk management and catastrophe pricing. This has encouraged the development of industry catastrophe models and departments within insurance and reinsurance companies devoted to catastrophe analysis and pricing.

The events of September 11, 2001 have provided a new sense of urgency in the insurance, reinsurance and catastrophe modeling arenas, as the industry scrambles to evaluate and price the potential terrorist exposure.

This seminar will focus on various aspects of catastrophe risk management and pricing. A session on current efforts in the area of modeling terrorist exposure will be included. The first part of the seminar will address some of the issues associated with pricing cat business:

• Do outside vendor models always agree and what does this mean in respect to confidence bonds?
• Given a model, is it possible to get a range of answers with one data set?
• Given some event set, how does one arrive at some point estimate of price? On this last issue we will explore two currently popular pricing algorithms, looking at relative strengths and weaknesses.

The second part of the seminar will discuss basis risk in index-based reinsurance covers and correlation issues. Industry loss index-based and seismic/meteorological parameter-based risk transfer instruments such as the ILW (industry loss warranty) and other catastrophe insurance derivative products (e.g. parametric cat bonds) have proliferated in recent years. The settlement mechanism of these instruments is much simpler than that of indemnity-based (re)insurance or securitization products. Thus, these instruments tend to simplify underwriting and claim processes, reduce moral hazard, and encourage the participation of the capital market in bearing (re)insurance risks. However, they have introduced a new type of risk, basis risk, because the loss sustained by the insured does not necessarily correlate highly with the amount of claim collectable from the index-based contracts. This type of risk becomes increasingly important as there are growing interests among insurers and reinsurers in using these instruments for the purpose of not only hedging "mega-cats" such as Hurricane Andrew, but also controlling the effects of medium-sized catastrophes on the volatility of the final results.

This presentation first reviews a commonly used measure of basis risk, namely the modeled correlation coefficient between the insured's actual loss and the payment from the index-based contract. We illustrate its lack of direct actuarial implication and introduce an alternative measure to quantify the basis risk. We show that a buyer can use this measure to make sensible decisions as to whether an index-based instrument is a viable risk transfer tool for a given underlying risk portfolio. We also demonstrate how the basis risk measure can be derived based on the output of a catastrophe model.

The third part of the seminar will focus on the practical aspects of modeling a catastrophe loss distribution. Various issues which can complicate the portfolio modeling process will be discussed, and some simple potential solutions for these complications will be shared. This session will be aimed at those who are responsible for reporting to management on catastrophe capacity utilization.

The fourth topic of the seminar will address issues related to data quality and catastrophe modeling. GIGO (Garbage In, Garbage Out) is an age-old phrase meaning that a model is only as good as the input data. This part of the seminar investigates some of the issues regarding portfolio data, including the following:

• Geographic resolution
• Known vs. unknown building characteristics
• Quality control
• Ways to measure data quality
• The effects of data quality on the results of catastrophe models.

As an addition to the original program, we are pleased to include a session addressing the topic of modeling terrorism exposures and urban catastrophe risk management.

This session will first look at ways of better managing the accumulation of risk in any one geographic area, as well as ways of better understanding the vulnerabilities of exposure, such as exposure density and relationships to landmark or critical structures. The role of scenario-based modeling in urban cat risk will also reviewed. Scenario modeling of locally destructive events (both intentional and accidental) can be used to identify the risks associated with concentrations of property, workers comp, and business interruption exposures, as well as to identify geographic regions where losses can be correlated between different lines of business. Finally, potential approaches for probabilistic quantification of urban catastrophe risk will also be reviewed.

(1) In constant dollars. Source: Swiss Re Economic Research & Consulting, sigma no. 2/2001

Speakers:
Richard R. Anderson, FCAS, Chief Actuary
Risk Management Solutions, Inc.
Jonathan B. Hayes, ACAS, Vice President
Guy Carpenter & Company, Inc.
Laurie A. Johnson, AICP, Vice-President, Global Risk Applications
Risk Management Solutions, Inc.
Peter R. Martin, FCAS, Vice President Reinsurance
Axis Specialty
Lixin Zeng, Ph.D., Senior Vice President, Product Development
Willis Re

Attendance is limited to a maximum of 50 participants. Attendees will be selected on a first registered, first accepted basis. The morning will begin at 8:00 AM with registration and continental breakfast. The seminar will begin promptly at 8:30 and will end at approximately 5:00 PM. Fees will be refunded for cancellations received in writing by February 21, 2002 less a $50 processing fee.

Hotel Information
There are a limited number of rooms reserved for the evening of February 27. The rate is $129 for a single or double room. To make a reservation, please call (212) 661-9600 and refer to the Casualty Actuarial room block. *Reservations must be made by February 6, 2002.*