World Bank Group Managing Catastrophe Risks at the Industry Level: The World Bank Prospective Eugene N. Gurenko Senior Insurance Specialist World Bank/IFC Insurance Unit Washington DC April 28-29, 2002 Distance Learning Course for Insurance Supervisors

World Bank Group 2 Key Messages n Large non-diversified cat risk accumulations in domestic insurance industry can be potentially devastating for its financial health. n Understanding of companies’ catastrophe risk exposures benchmarked against their total claims paying capacity is an important element of supervisory work. n National risk pooling, additional reserving, contingent assessments on the industry or maximum risk retentions are some options to consider

World Bank Group 3 New York Sept. 11 Insured Loss Estimates n Total Insured Losses Estimated at about $38 Billion (WSJ gives $70B as max) n Total Economic losses range up to $105B in NY alone: Job loss, business interruption, tourism, RE tenants

World Bank Group 4 Catastrophe Risk Management: Key Issues to Consider n Actuarially Sound Rates for Cat Risk n Risk Retentions vs. Risk Transfer for Companies with Significant Cat Risk Accumulations n Credit Quality of Reinsurers and Retrocessioners n Requirements for Insurers’ Total Claims Paying Capacity (in case of catastrophe accumulations).

World Bank Group 5 Risk Based Determination of the Company’s Claims Paying Capacity n Understand underlying risk exposures and how they translate into PMLs and expected annual losses based on previous loss performance (through actuarial work based on loss frequency/severity) and exposure data (through stochastic models of risk and portfolio risk accumulations). n Determine claims paying capacity needed to survive catastrophic events with a certain threshold of certainty (loss non-exceedance curves) n Estimate the existing claims paying capacity of the company.

World Bank Group 6 Determining the Insurer’s Claims Paying Capacity Requirements: a Hypothetical Example

World Bank Group 7 Defining Total Claims Paying Capacity is a Sum of: n Shareholder equity (net of minimum capitalization and solvency margin requirements) n Net Premiums- these are premiums net of ceding commissions and reserves. n Retrocession (reinsurance) Excess of Loss Treaty(XL) Limits (or exhaustion limit): The maximum limit for recoveries on a per occurrence basis for all XL retrocession (reinsurance) treaties from international reinsurers.

World Bank Group 8 Conclusions n Risk assessment technology presents new opportunities for risk based supervision of catastrophe risk management n Capital market investors/reinsurers seeking diversified risk in other than the US/Japan markets n Attention to industry’s management of catastrophe accumulations should be an important part of supervisory work.