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Presentation to CARE Conference Boston, MA June 15th, 2000

Presentation to CARE Conference Boston, MA June 15th, 2000. Overview. What models are there? What are they good for? What aren’t they good for? Four examples of model-inspired reinsurance structures Pitfalls. 1. Using Cat Models. What models do we use? EQECat US Wind US Quake

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Presentation to CARE Conference Boston, MA June 15th, 2000

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  1. Presentation to CARE Conference Boston, MA June 15th, 2000

  2. Overview • What models are there? • What are they good for? • What aren’t they good for? • Four examples of model-inspired reinsurance structures • Pitfalls 1

  3. Using Cat Models • What models do we use? • EQECat • US Wind • US Quake • World Cat • RMS • IRAS 3.7 • 4.1 being tested • AIR • Catrader • CLASIC • Dames & Moore • Tempest Re proprietary 2

  4. What models do we use? 3

  5. What are they good for? • Underwriting/Pricing • Consulting with clients • Portfolio/Capital Management 1 4

  6. Underwriting with Cat Models • Which perils are best suited to models? • Hurricane • Earthquake • Flood • Extra tropical storm 5

  7. Underwriting with Cat Models • Which perils or issues are not? • Winter storm • Tornado/Hail • Freeze • Fire - Brush & Fire Following • Volcanic eruption • Riots, etc • Business Interruption • “Cross territorial” clash • “Non landfall” events (Floyd) 1 6

  8. How do we use them? • Assess the data • Run the models simultaneously • Collate the output • Evaluate on differences • LOB • Data • Region • Peril • Cat Management credit 7

  9. Loss Pick 8

  10. Loss Pick 9

  11. Pricing ROE = (Price*.9-0.11)/0.45+.04 ROL of 17.75% would produce sufficient ROE (15%) 10

  12. Limit Example • Florida • Coverage to attach at a defined PML - e.g. 30 years • Limit to track 100 year PML • Price is simply a ROL applied to calculated limit ($40mm) 11

  13. Limit Example • Florida • Limit and retention drop due to decrease in exposure • ROL now applied to a limit of $25mm excess $15mm • No more exposed than before, just lower down in dollar terms 12

  14. Limit Example • Florida • Now limit has increased beyond year one • $62mm excess $38mm 13

  15. Limit Example • Florida • Limit is usually capped ($65mm) 14

  16. Limit Example • Florida • Even if 100 year pml is higher than $65mm excess $46mm • Results in more retained net 15

  17. Limit Example • Florida • For Florida covers, a major complication is FHCF • Cover becomes a “Wrap” around FHCF • Warrant a minimum FHCF cover amount 16

  18. Pricing Example • California Earthquake • Start up Residential EQ writer • Only needs limit as exposed on a month-to-month basis • Calculation: • Rate*(250 yr PML - attachment)*(GU Loss*probability)/10.5 17

  19. Swap Example • Trade limit of coverage at pre-agreed EL • Requires transparent modeling • Like perils, or even diverse perils • Florida wind for Japan wind • Capital efficient • Could charge loss cost, or identical premium • Real benefit is release of capital 18

  20. Structure Example • Models are not credible for some perils • Occurrence structure (hours clause) is not best suited to all perils • Not all clients fit into a model-designed solution • Examples • Other Wind • Winter Weather 19

  21. Structure Example • Client wanted all ww claims to be classified as one occurrence - models can’t do that • Occurrence definition for cat cover would need to be broadened • Strip out ww claims & simulate trended historical experience • Add in other perils on more traditional hours clauses, using models • Capital selection is tricky 20

  22. Pitfalls • Blocking and tackling is still required • Coverage A only Unicede • Exposure base as of when? • Commercial exposures are the same as Personal Line exposures • Event Set is incomplete • Model myopia 21

  23. Pitfalls 250 Yr PML 22

  24. Pitfalls 250 Yr PML 22

  25. Conclusion • The old way of underwriting is no good 23

  26. Conclusion • The old way of underwriting is no good • Models know best 23

  27. Conclusion • The old way of underwriting is no good • Models know best • Models don’t know everything 23

  28. Presentation to CARE Conference Boston, MA June 15th, 2000

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