From BattleActs
Jump to: navigation, search

Covers risk management practices for insurers with material earthquake exposure.   Forum

Pop Quiz

Today's Pop Quiz is really from OSFI's MCT reading, but it relates to calculating earthquake reserves. Do you remember how to do it???!!! (I'll give you an easy one!)

Question: If the modeled ERX (Earthquake Risk Exposure) with phase-in is 135,919, and the financial resources are currently 60,000, calculate ERC (Earthquake Reserve Component).


Based on past exams, the main things you need to know (in rough order of importance) are:

  • key principles of earthquake risk management (analyzing SCENARIOS for improvements to earthquake risk management)
  • best practices for earthquake modeling [Hint: DAQKD-UP]
  • financial resources supporting earthquake risk [Hint: CREC-it]
  • non-modeled exposures that may impact PML (Probable Maximum Loss) calculation
  • data testing, model validation, version management
reference part (a) part (b) part (c)
E (2018.Spring #17) see OSFI.MCT eqk modeling: DAQKD-UP
- best practices
- financial resources
E (2017.Fall #18) see OSFI.MCT key principles:
- PML (probable maxiumum loss)
E (2017.Spring #17) SCENARIO:
- improve eqk risk management
E (2016.Fall #17) see OSFI.MCT eqk modeling: DAQKD-UP
- best practices
- non-modeled exposures
E (2016.Spring #17) eqk data:
- testing
eqk modeling: DAQKD-UP
- best practices
- non-modeled exposures
E (2016.Spring #27) PML:
- multi-region exposures (BC,QC)
- reporting (Cdn v Foreign) 1
E (2015.Fall #16) PML: CREC-it
- financial resources
key principles:
- eqk risk management
E (2015.Spring #18) model version & validation:
- sound practices
- non-modeled exposures
- financial resources RESTRICTIONS
E (2014.Fall #15) eqk modeling: DAQKD-UP
- best practices
key principles:
- PML (probable maxiumum loss)
- financial resources
E (2014.Spring #16) SCENARIO:
- risk management failures
- improve eqk risk management
- financial resources
E (2013.Fall #33) key principles:
- eqk risk management
1 The answer in the examiner's report isn't clear. Check the forum for a better answer.

In Plain English!

Exam Hack

  • Focus on Section 2: Key Principles
  • Don't spend too much time on Sections 1,3,4,5. (There are BattleCards for these sections after you've thoroughly learned Section 2.)
  • Observation: You may have noticed prior exam problems that ask you to calculate earthquake reserves. Those problems are actually from the insurance risk section of OSFI.MCT, Section 4.5.1

Section 1 & 5: Purpose, Scope, Terms

Just a few basic facts. It's pretty easy.

mini BattleQuiz 1 You must be logged in or this will not work.

Section 2: Key Principles for Managing Earthquake Exposure

You can see from the BattleCards that this section is heavily tested. These are easy points to get on the exam if you take the time to memorize the details. (According to the examiner's reports, most candidates don't learn the earthquake facts thoroughly enough.)

Question: describe the 5 key principles for managing earthquake exposure.
  1. Risk Management:
    • earthquake exposure risk management policies are subject to oversight by Board of Directors and implemented by Senior Management
  2. Data Management:
    • data required is MORE than for traditional ratemaking
    • must address data Integrity, Verification, Limitations (IVL)
  3. Models:
    • understand (assumptions, methods, limitations) of earthquake models
  4. PML: (Probable MAXIMUM Loss)
    • PML = Total Expected Ultimate Cost
    • includes considerations for data quality, non-modeled exposure, model uncertainty, multi-region exposure
  5. Financial Resources & Contingency Plan:
    • Financial Resources: quantification of how financial resources cover PML
    • Contingency Plan: how to continue efficient business operations after disaster

These principles have been asked on (2015.Fall #16c), (2013.Fall #33). Note that they don't always ask for all 5 principles, but you should learn all 5 anyway. (All 5 principles have further details that are covered in the BattleCards.)

mini BattleQuiz 2 You must be logged in or this will not work.

Principle 3: Models

Question: what are the best practices for earthquake modeling [Hint: DAQKD-UP]
  • This is heavily tested: (2016.Fall #17b), (2016.Spring #17b), (2014.Fall #15a)
  • The hint is pronounced Dacked-Up) (It's rude, but it sounds like F**KED-UP, which is what earthquakes do. They f**k you up. Now you'll never forget it!)
Abbreviation Meaning Best Practice
D Docs document use of model within risk management program
A Alternatives explain why a particular model is used versus alternatives
Q Qualified qualified staff needed to run in-house models regularly
K Knowledge AML (i.e. must have KNOWLEDGE of Assumptions, Methods, Limitations of Model)
D Data provide evidence to show that GRANULARITY & QUALITY of data is appropriate
---- ----
U Uncertainty understand how uncertainty affects: (capital adequacy, reinsurance requirements)
P PML if PML(model 1) <> PML(model 2): explain (differences, subsequent model adjustments)

The section on earthquake models is very detailed. Consider the following 2 questions:

Q1: What are sound practices for earthquake model versions? (2015.Spring #18a.i)
Q2: What are sound practices for earthquake model validation? (2015.Spring #18a.ii)

The questions sound similar, but have different answers. Answers in mini BattleQuiz.

mini BattleQuiz 3 You must be logged in or this will not work.

Other Top Earthquake Questions

At some point, make sure to check out BattleHack #1 - Top Questions from the BattlePlan in the main part of the BattleAct. site. There are two questions from earthquake key principles that have appeared on 3 prior exams.

Question 1: identify non-modeled exposures to consider when calculating PML.
Exam reference: (2016.Fall #17c), (2016.Spring #17c), (2015.Spring #18b)
  • exposure growth between (date of data) & (relevant exposure period)
  • consider adequacy of ITV (Insurance-to-Value)
  • consider GRC (Guaranteed Replacement Cost) - may be inadequate due to inflation
  • increased seismicity after large event
Question 2: identify financial resources that can be used to support the PML for an earthquake. [Hint: CREC-it - sounds like the insect cricket
Exam reference: (2015.Fall #15b), (2014.Fall #15c), (2014.Spring #16c) (See also section in OSFI's MCT paper)
abbreviation meaning financial resource
C Capital use Capital & Surplus from the B/S (max 10% of capital & surplus)
R Reinsurance most insurers use cat Reinsurance
E Earthquake EPR (Earthquake Premium Reserve)
C Capital Capital market financing

ATTENTION: Pay particular attention to (2017.Fall #18a). This was the hardest earthquake calculation question to date, but it isn't from the earthquake paper. The information formulas you need is actually from the insurance risk section of OSFI.MCT, Section 4.5.1. Here, instead of simply asking you to list the financial resources as in the above table, they ask you to calculate the value. That means you have to calculate each component separately using balance sheet and other numerical information.

Anyway, here are few more practice questions...

mini BattleQuiz 4 You must be logged in or this will not work.

Section 3 & 4: Regulatory Reporting & Guideline Administration

As of (2017.Fall) there have not been any questions from these sections of the paper. But there have been questions regarding roles & duties of the Board of Directors and senior management from other papers. If the CAS is searching the earthquake reading for new questions, this is one area that has not yet been touched. (My judgment, however, is that these are lower-probability questions)

mini BattleQuiz 5 You must be logged in or this will not work.



  • Just do the BattleCards (especially from Section 2). Note that the really, REALLY important memory items are:
Memory Item Hint
5 Key Principles for Earthquake Exposures Risk Management Data Management, Models, PML, Financial Resources & Contingency Plan
7 Best Practices for Earthquake Modeling DAQKD-UP
4 Non-Modeled Earthquake Exposures Exposure-growth.ITV (Insurance-to-Value).GRC (Guaranteed Replacement Cost).aftershocks!!
4 Financial Resources for Earthquake Exposures CREC-it


  • You should understand that it is difficult to set accurate prices and reserves for earthquakes. This is because they are infrequent and potentially, but not always, severe A good conceptual exam question to review is: (2014.Spring #16ab). (You are given information about a company's earthquake exposure practices then asked to provide a critique and suggest improvements.


  • None. (Recall that the calculation of earthquake reserves is part of OSFI.MCT.)
  • Expect roughly 2.0 - 2.5 pts from this reading on the exam

Full BattleQuiz You must be logged in or this will not work.



  • ERC = ERX – FinRes = 135,919 - 60,000 = 75,919