managing catastrophe risk? - actuaries institute...this presentation has been prepared for the...
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Managing Catastrophe Risk?
Ty Birkett
© Willis Re Australia
This presentation has been prepared for the Actuaries Institute 2016 Managing Extreme Events (In an Uncertain World).
The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of the Institute
and the Council is not responsible for those opinions.
Measure Manage Mitigate
Today
• A risk appetite survey
• The things you see
• Managing “extreme” events
Risk Appetite Statements?
Reinsurance Decision Making Do you consider peers’ RI?
Most Important Metric when Considering Reinsurance
Most Important Capital Measure when Considering Reinsurance
The Things You See Set and Forget: Assumption of Model Reliance
Not included in models for Hurricane Katrina (source: Lloyds model evaluation): • Levee failure for storm surge (outside of New Orleans and Galveston seawall) • Inland flooding • Wind and flood in certain non-coastal states (Ohio, Kentucky, Indiana) • Etc.
“We were seeing things that were 25-standard moves, several days in a row”
…. David Viniar, CFO, Goldman Sachs
The Things You See Simplistic Risk Appetite
No more than 5% probability of breaching 120% of APRA PCR
What is the impact of buying to 1 in 500 years rather than 1 in 1000 years?
Question meaningless given way risk appetite measured
The Things You See Assuming All Tails are the Same
-
1
2
3
4
5
6
7
0 200 400 600 800 1000
Bill
ion
s
Return Period
EQ OEP Curve (scaled to $50M of AAL)
Australia
New Zealand0%
50%
100%
150%
200%
AA
L
1 in
2
1 in
5
1 in
10
1 in
25
1 in
50
1 in
10
0
1 in
10
00
1 in
25
00
1 in
50
00
1 in
10
00
0
Realitivity Australia to NZRelativity Australia to NZ
The Things You See
Lost in Herd Mentality
The Things You See
Lack of Understanding of Correlation in the Tail
Life
GI
Bank
The Things You See
Focussed on Commercial Circumstances
If we price for [INSERT] our premiums will not be competitive
In the current market
To Manage the Extreme Tail
Ensure “Measure” is part of “Manage”
Refine
Learn
Test
Common sense
Ensure correct focus
If not in model …. it still exists
Think about the hard stuff … e.g. correlations
To Manage the Extreme Tail
Strong Risk Management Framework
True CRO function
Move away from box ticking
Ask questions
Group level functions
To Manage the Extreme Tail
Appropriate Risk Appetite and Metrics
What is beyond the 1:200?
What about repat events?
Multi-dimensional approach
Regulatory v Rating Agency v Economic considerations
Cat Model Output
Return period (years)
Lo
ss A
mo
un
t
Cat Model Output
Return period (years)
Lo
ss A
mo
un
t What happens
here?
To Manage the Extreme Tail
What Happens Post an Event?
Capital depletion
Reinsurance pricing
Risk Appetite
Disrupted Market place
Varying impacts
To Manage the Extreme Tail
Overall
Capital alone is not the answer
Care with short term thinking
The next event will be:
• Different!
• Have “unmodelled” components
• Changes mindsets (and potentially models)
• Present opportunities
Measure Manage Mitigate