RockettScience Ltd.

Bringing Clarity to Catastrophe Risk

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Introduction

Over the past three years, catastrophe events such as earthquakes, floods, and hurricanes, have produced global insured losses totaling more than $250bn.

From a solvency angle, catastrophe risk is a major, if not the major risk to insurers and reinsurers balance sheets and has to be carefully managed. Solvency II regulations in Europe require insurers to have sufficient capital available to cover all sources of loss in a one year period up to a 99.5% confidence level (Solvency Capital Requirement). 

Determining the 99.5% confidence level is a substantial challenge for firms, with many producing complex Internal Models. Results from catastrophe models provide a key input into Internal Models.

Catastrophe models aim to assess the likelihood of loss to the firm from catastrophe events. They are generally based on a wide range of assumptions which need to be understood to get the most out of them. In particular, their strengths and limitations should be known and any important elements missing from these models should be properly considered and allowed for, e.g. inland flooding caused by hurricanes and typhoons. The board should be aware of these issues and any notable adjustments to compensate.

From a validation and documentation perspective, catastrophe models are treated as “External Models” for the purposes of Solvency II and firms need to ensure they are fully validated with their own data and pass various tests including the Solvency II “Use Test”. Many firms are finding this challenging and lack the resource to overcome it.

RockettScience provides a range of consultant services to assist clients with many aspects of catastrophe risk including validation and documentation for Solvency II.