1. Presentation to CARE Conference
Boston, MA
June 15th, 2000

2. Overview What models are there? What are they good for?
What aren’t they good for?
Four examples of model-inspired reinsurance structures
Pitfalls 1

3. Using Cat Models What models do we use? EQECat US Wind US Quake
World Cat
RMS
IRAS 3.7
4.1 being tested
AIR
Catrader
CLASIC
Dames & Moore
Tempest Re proprietary 2

4. What models do we use? 3

5. What are they good for? Underwriting/Pricing Consulting with clients
Portfolio/Capital Management 1 4

6. Underwriting with Cat Models
Which perils are best suited to models?
Hurricane
Earthquake
Flood
Extra tropical storm 5

7. Underwriting with Cat Models
Which perils or issues are not?
Winter storm
Tornado/Hail
Freeze
Fire - Brush & Fire Following
Volcanic eruption
Riots, etc
Business Interruption
“Cross territorial” clash
“Non landfall” events (Floyd) 1 6

8. How do we use them? Assess the data Run the models simultaneously
Collate the output
Evaluate on differences
LOB
Data
Region
Peril
Cat Management credit 7

9. Loss Pick 8

10. Loss Pick 9

11. ROL of 17.75% would produce sufficient ROE (15%)
Pricing
ROE = (Price* )/
ROL of 17.75% would produce sufficient ROE (15%) 10

12. Limit Example
Florida
Coverage to attach at a defined PML - e.g. 30 years
Limit to track 100 year PML
Price is simply a ROL applied to calculated limit ($40mm) 11

13. Limit Example
Florida
Limit and retention drop due to decrease in exposure
ROL now applied to a limit of $25mm excess $15mm
No more exposed than before, just lower down in dollar terms 12

14. Limit Example Florida Now limit has increased beyond year one
$62mm excess $38mm 13

15. Limit Example
Florida
Limit is usually capped ($65mm) 14

16. Limit Example
Florida
Even if 100 year pml is higher than $65mm excess $46mm
Results in more retained net 15

17. Limit Example Florida For Florida covers, a major complication is FHCF
Cover becomes a “Wrap” around FHCF
Warrant a minimum FHCF cover amount 16

18. Pricing Example California Earthquake Start up Residential EQ writer
Only needs limit as exposed on a month-to-month basis
Calculation:
Rate*(250 yr PML - attachment)*(GU Loss*probability)/10.5 17

19. Swap Example Trade limit of coverage at pre-agreed EL
Requires transparent modeling
Like perils, or even diverse perils
Florida wind for Japan wind
Capital efficient
Could charge loss cost, or identical premium
Real benefit is release of capital 18

20. Structure Example Models are not credible for some perils
Occurrence structure (hours clause) is not best suited to all perils
Not all clients fit into a model-designed solution
Examples
Other Wind
Winter Weather 19

21. Structure Example
Client wanted all ww claims to be classified as one occurrence - models can’t do that
Occurrence definition for cat cover would need to be broadened
Strip out ww claims & simulate trended historical experience
Add in other perils on more traditional hours clauses, using models
Capital selection is tricky 20

22. Pitfalls Blocking and tackling is still required
Coverage A only Unicede
Exposure base as of when?
Commercial exposures are the same as Personal Line exposures
Event Set is incomplete
Model myopia 21

23. Pitfalls
250 Yr PML 22

24. Pitfalls
250 Yr PML 22

25. Conclusion
The old way of underwriting is no good 23

26. Conclusion
The old way of underwriting is no good
Models know best 23

27. Conclusion The old way of underwriting is no good Models know best
Models don’t know everything 23

28. Presentation to CARE Conference
Boston, MA
June 15th, 2000