9 August 2018Actuarial & underwriting

Captives must be wary of inconsistent nat cat models

Natural catastrophes are not predictable, so a cookie cutter programme or off the shelf cat model are bad ideas for captives. Instead, risks should be underwritten with some level of bias towards the parent organisation taking into accounts its deep understanding of the risks.

This according to a panel, ‘Natural Catastrophes and their Impact on Risk Management’, at the VCIA annual conference in Burlington, Vermont. Speakers included: John Ferrara, senior manager at Ernst & Young; Gillian Galford, research assistant professor at the University of Vermont; Howard Kunst, chief actuary at CoreLogic; Jason Shafer, professor at atmospheric sciences at Northern Vermont University-Lyndon; and Brad Waldron, vice president, risk management, Caesars Entertainment.

“The value of having a captive is that you are your best underwriter,” said Waldron. “Models are really nice to look at and are perceived as an objective way to view exposure - given the variables that are put in - but there needs to be a business decision on how to use them.”

Waldron gave advice to captive owners unsure of their cat models: “If you’re sitting on a model that you aren’t convinced of, you need to ask yourself why. The modelling you are using really needs to fit your operation.”

Galford stressed the importance of understanding the local changes to climate, and that talks about big global changes in climate can detract from the more immediate and closely proximate changes that manifest.

She used Vermont as an example, which has experienced rising temperatures, increasing precipitation and bigger storms, citing the NOAA/NWS Vermont Climate Assessment. This has had an impact on a number of areas such as tourism and agriculture.

A lot of captives have property risk, and some captive have concentrations of risk, and knowing what the impact of a wildfire or a flood on the business covered by the captive could be very important, Kunst noted.

As an example, he noted that a 50ft difference in location is huge if talking about wildfires and flood.

“Just because you haven’t had an event, that doesn’t mean you will never have one,” said Kunst. “I find even in the general insurance industry, there’s some miscommunication about models, the different kinds, and what they do.”