Articles - Reserving for Catastrophe events

In the aftermath of a catastrophe event, how many days will it take a (re)insurer to provide estimates of its losses to its management board? Jahan Anzsar, a group reserving manager at Catlin Group, explains how an accurate estimate can be achieved as efficiently as possible. In an ideal world, the most robust loss estimate for a catastrophe event is to analyse the (re)insurer’s potential exposure to the event by individual contract. However, in the immediate aftermath of a catastrophe, a market-share approach or outputs from catastrophe modelling software may be the only viable options available to produce an initial loss estimate

 . Although these measures can only provide rough and ready estimates, having good after-the-event governance and a rigorous process to record estimates from individual contract will allow a (re)insurer to quickly progress from the initial estimate to an exposure-based approach.
 After-The-Event Recording Measures
 One such good measure is to set out an agreed after-the-event process to capture incoming losses. Having a ready-made standardised template or central database for recording such exposures at a contract level is important. Not only does this help bring greater transparency to the process and assumptions used to arrive at the loss estimates for each contract, but it also allows a (re)insurer’s management to quickly get a feel for the robustness of the estimates as well as where the main sources of uncertainty are, which in turn allows them to make better decisions about overall accuracy of the loss estimates.
 More often than not, (re)insurers record information by individual contract in a variety of different spreadsheets, each of which has its own design and varying degrees of detail. This approach makes it difficult to collate and summarise the loss information quickly and efficiently, and it increases the potential for errors to be made in the calculation of loss estimates.
 The agreed design of any standardised template or database for recording loss estimates by individual contract is likely to vary by (re)insurer depending on the nature of the underlying exposures. However, there are a few key items that should be captured for each contract, such as:
 • Name of the insured/cedant
 • Underwriting year of the policy
 • Policy number
 • Limits and deductible information (including occurrence limits where applicable)
 • Policy inception/expiry dates
 • Settlement currency
 • Signed line
 • Ground-up-loss (‘GUL’) estimate (this can be both the amount advised by the insured/cedant as well as the amount assumed by the (re)insurer)
 • Reserving class/group
 • Claims paid and incurred amounts
 • Estimated gross ultimate claims (based on the selected GUL estimate)
 • A flag to indicate whether the contract has any outwards reinsurance protection
 • Estimated net ultimate claims (based on the selected GUL estimate)
 • Comments around the rationale for the selected GUL
 • Date information was last reviewed/updated
 • Details of who last reviewed/updated information
 • A code which summarises the potential downside risk of each contract:
 o 0: Definitely not exposed
 o 1: Unknown whether exposed or not
 o 2: Exposed and reserved as partial loss
 o 3: Exposed and reserved as total loss
 Just before a change is made to the information for a particular contract, a version of the template/database can be saved so that any changes made can be tracked.
 The code assigned to each contract allows downside risk calculations to be made quickly. For example, such calculations can ignore and eliminate Code 0 contracts, whereas Code 1 contracts can be assigned a ‘burn’ factor (which management can decide on) based on whether each of these contracts are perceived to have a low/medium/high chance of a loss arising.
 Documenting the rationale for each estimate (as well as the date it was last reviewed) is particularly important as this gives an indication of the robustness of each estimate. Example comments could include: “Based on broker/loss adjustor advice” or “Total loss expected as per cedant’s website”.
 The combination of the coding assigned to each contract as well as the documentation included around the rationale for each estimate will provide a clear view of those contracts for which focus would need to be placed on in order to produce a more robust overall loss estimate.
 The Benefits
 The benefits to having standardised templates and processes for recording catastrophe loss estimates are many, including:
 • Enabling external parties, such as auditors, independent actuaries and regulators to easily assess the process applied by the (re)insurer to produce its loss estimates,
 • Allowing the quick production of key information for management, such as details of affected contracts and total downside risk in monetary terms,
 • Ability to easily sensitivity test the (re)insurer’s loss estimates through varying the underlying assumptions (e.g. increasing the GUL estimate by 10% for each contract and quantifying the resulting gross & net of reinsurance impact to the (re)insurer). This would also help give senior management a view of the potential downside risk of the current loss estimates,
 • Reducing uncertainty in loss estimates produced through being able to easily identify key areas of uncertainty and then taking steps to reduce this uncertainty (e.g. through gathering further information).
 As well as having standardised templates for recording loss estimates, a pre-agreed timeline for what will be done by whom in the hours and days following a catastrophe event is worthwhile i.e. a ‘post-catastrophe rapid response reserving process’. Together with a structured aftermath process, a specified timeline and a standardised way of capturing losses will ease the burden of relying solely on market share estimations.
 Both 2013 and 2014 have so far been relatively ‘quiet’ years in terms of major catastrophe activity, especially when compared to 2010 and 2011. As such, this is a good time to ensure you have the right processes in place to deal with reserving for the next spate of catastrophe events!

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