Spring 2019 Q18

slocksonslockson
in BCAR.Cat

Hi Graham, For Spring 2019 Q18(d), we are asked to:

I feel like in order to improve an AM Best rating, only the factors that AM Best considers important should be considered. According to the source reading, the 4 important factors are: Models, MML (measure, monitor and limit), Aggregated exposure and Data quality. However in the examiner's report, a lot of other factors (from OSFI Earthquake) were accepted.

My guess is that the AM Best list is not exhaustive and that other factors from OSFI.Earthquake also make sense and would improve an insurer rating. I'm not really sure how important the distinction between EQ risk management from OSFI.Eq and BCAR.Cat are?

Comments

  • grahamgraham

    I've noticed in past examiner's reports that for questions like this, the graders are more willing to accept a wider variety of answers. This is more of an open-ended question and they seemed to accept any answer that could reasonably be expected to improve an insurer's catastrophe risk management. And if an action improves catastrophe risk management, it should theoretically improve the Best rating as well even if it isn't stated explicitly in the source reading. The 2 readings on A.M. Best are basically just overviews anyway.

    So, you're right that the list from the Best reading is not exhaustive, and the list from the OSFI earthquake reading isn't exhaustive either. When you're talking about qualitative considerations, there are probably many, many valid answers.

  • slocksonslockson

    Great, thank you for your thoughts!

  • cornedovcornedov

    For part C of this question they ask how personal property earthquake exposures would impact the surplus used in the AM Best BCAR score.

    If we are talking about the stressed BCAR score then the increase in EQ exposures would increase the PML which would mean surplus would reduce even further when applying the natural catastrophe stress test. If we are talking about the standard BCAR score im not sure its so clear what the effect will be on surplus. If the earthquake exposures are profitable we may see surplus increase. If the earthquake exposures are unprofitable then we would expect surplus to decrease. Is it fair to assume that based off this they are talking about the surplus under the natural catastrophe stress test?

    As a side note, an increase in earthquake exposure would likely reduce the standard BCAR score since at the tail the NRC would be larger with more earthquake exposure. But since the question asks about the impact of surplus I think to EDO(lura-sd-fig) and here its not so clear what the impact of increase earthquake exposures will be.

  • Staff-T1Staff-T1

    In general, premiums are always positive on an expected value basis. If a line of business is unprofitable, you would just not write it. Also, just because your expected value is positive, does not mean your surplus will increase. If that is the case any insurer could just write unlimited amounts of business.

    What do you mean by EDO(lura-sd-fig)?

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