3Qs on Chapter 7 Catastrophe Models

[Bill SD]

Hi, Greatly appreciate any answers to these 3 basic questions:

Pg 6: Event module: A database of stochastic events (the event set) with each event defined by its physical parameters, location and annual probability / frequency of occurrence.

Q1: What are these physical parameters (since windspeed etc. is in Hazard module)?

Pg 12: There are a number of factors that affect the accuracy of tropical cyclone models (and similarly other perils later in chapter) for a particular territory, including: ….Changes in demographics"

Q2: Does 'demographics' mean the amount of insured people & exposure living in the area hit by hurricane? (influenced by societal move to mega-cities on US coast, number & age of people living in each affected property, property and contents value of buildings in hurricane areas , growing protection gap, etc)

Pg 24:
"Pricing actuaries thus currently use catastrophe models in a variety of different ways. These include:

• developing appropriate allowances for catastrophe risk in exposure rating (for example, primary property)
• helping develop risk-specific pricing for catastrophe risk based on the underlying exposures (for example, flood zone pricing and catastrophe reinsurance pricing)"

Q3: What's the difference between these 2 bullets (exposure rating and risk-specific pricing)? [I took SP7&9 & didn't study SP8, where presumably this was explained in depth]

 

[Aman Sehra]

Pg 6: Event module: A database of stochastic events (the event set) with each event defined by its physical parameters, location and annual probability / frequency of occurrence.

Q1: What are these physical parameters (since windspeed etc. is in Hazard module)?

The event module is a database of all of the actual events themselves, ie a hurricane at this location and this category, an earthquake at a different location of a different intensity, etc etc. It's all about the actual events themselves. The hazard module considers the consequences of that event, including things like windspeed, ground shaking, flood depth etc.

Pg 12: There are a number of factors that affect the accuracy of tropical cyclone models (and similarly other perils later in chapter) for a particular territory, including: ….Changes in demographics"

Q2: Does 'demographics' mean the amount of insured people & exposure living in the area hit by hurricane? (influenced by societal move to mega-cities on US coast, number & age of people living in each affected property, property and contents value of buildings in hurricane areas , growing protection gap, etc)

Spot on

Pg 24:
"Pricing actuaries thus currently use catastrophe models in a variety of different ways. These include:

• developing appropriate allowances for catastrophe risk in exposure rating (for example, primary property)
• helping develop risk-specific pricing for catastrophe risk based on the underlying exposures (for example, flood zone pricing and catastrophe reinsurance pricing)"

Q3: What's the difference between these 2 bullets (exposure rating and risk-specific pricing)? [I took SP7&9 & didn't study SP8, where presumably this was explained in depth]

The top point is more around coming up with a 'loading' eg 5% uplift to cover cat exposure, for all risks. The second point is around entering specific risk details into a catastrophe model to determine expected loss cost for that insured, and loading that for profits / expenses to determine a premium (which would be in addition to the premium for any non catastrophe losses, such as fire, theft etc)

Given you've not taken SP8, it will still be worth purchasing the course notes to learn about Catastrophe Modelling, alternatively read around the subject a fair bit. I'd also suggest looking at previous cat modelling questions from SP8. The cat modelling materials in SA3 build on what's already in SP8.

Thanks
Aman
ActEd Tutor