June 2013Risk DynamicsShaping European Catastrophe Risk Management and facilitating a joint-response toMichel Barnier’s Green Paper on the insurance of natural and man-made disastersDr. Sebastian Rath, Principal Advisor
" About Risk Dynamics" Introducing the evolving debate on a framework forcatastrophe risk management and governance in Europe• Michel Barnier’s Green Paper on the insurance of natural and man-made disasters (European Commission, Strasbourg, 16.4.2013)• Impact on Internal Models and their uses for insurers and other riskcarriers" Appendix• The full questionaire as issued in the European Commission’sGreen PaperAgendaMay 2013 2
" Clients across all areas of Financial Services including Banking, Insurance, InvestmentManagement ands Regulators● North America, Europe, Middle East, Asia" Experienced, high quality team delivery across various office hubs● Over 50 financial institutions models reviewed or validated across all risk types and of different natures over past9 years● Over 40 specialists combining qualitative business, risk expertise, audit and regulatory compliance skills, withdeep quantitative skills (actuarial and PhD’s)" Sector Thought Leader● Benchmarks and maturity models built on vast range of experience● Regular roundtables organized with key players to understand market trends" Strong culture and values in terms of● Neutrality – from software / vendor models● Excellence and ExpertiseAbout Risk DynamicsProfile4
Risk Appetite• For large UK insurer, we reviewed and re-designed the firm risk appetite statements• For a mid-size mutual insurer, we defined and cascade their whole risk appetiteframework and designed their operational risk limit dashboardsModel Risk Management• Established Model Risk management framework for a large Dutch Insurer• For an international bank-insurer we reviewed their Validation framework andorganisation and produced all their policies and standardsScenario and Stress Testing• For a Belgian large insurer, we reviewed and enhanced their Stress Testingscenarios in the context of ORSA• We implemented a Scenario and Stress Testing framework for a large Dutch insurerRisk Management Framework• For large mutual insurer, we reviewed and enhanced their risk managementframeworks and supported them in managing their overall Pillar 2 / ORSA programs• For a Belgian health care insurer, we reviewed and enhanced their whole riskmanagement organisation and frameworkNon Financial Risk Management• For one of the largest international banking/insurance groups, we reviewed andenhanced the operational risk framework from both a qualitative and quantitativeperspective.Underwriting Risk Management• For an international Belgium based insurer, a large Dutch insurer and a large Irishregulated insurer, we validated Life and non-Life models (Internal Models)Financial Risk Management• For an international Insurer, we reviewed and enhanced their Economic Capitalmodel with a special focus on market riskIRM & Balance Sheet Management• For a large Belgian Bank-insurer, we enhanced their Integrated Risk Managementprocesses and improved performance by combining bank and insurance balancesheets• For a large mutual insurer, we optimised their capital structure in view to optimiseSCR ratios and enhance value creationOur services - Selected references in Insurance5Our services Selected Insurance ProjectsSelected Insurance Clients
Introducing the evolving debate on aframework for catastrophe risk managementand governance in Europe6
Latest EU Responses1. Joint Research Centre, September 2012• Natural Catastrophes: Risk relevance and Insurance Coverage in the EU2. European Commission, Brussels, 16.4.2013• An EU Strategy on adaptation to climate change3. European Commission, Strasbourg, 16.4.2013• Michel Barnier’s GREEN PAPER on the insurance of natural and man-made disasters• Responses due by June 30th 20137
Natural Catastrophe Risk in Europe81975-2008Source: French Ministry for Agriculture and Environment" Significant exposure to risk in EUcountries with weakened financialmarkets, some of which less (well)modelled than othersSource: European Environmental Agency: Climate change, impacts andvulnerability in Europe, 2012. An impact based report, EEA report No12/2012." The number of European catastropheevents are increasing
EU challenge of aligning insurance availabilitySituation assessment for large scale natural catastropheswhere1. EU citizens are at risk and less inclined to buy insurance protection in recessions, and2. risk carriers are potentially under-capitalized until SII is fully enforced and implemented, and3. governments have constrained funds readily available for large-scale emergency fiancing,there is the likely possibility that the EU is the last backstop.Does the EU have And what does it take to put in placethe funding though? these dominos again?9
" The objective of the Green Paper on the insurance of natural and man-made disasters, published by theEuropean Commission on 16/04/2013, is to raise awareness and to assess whether or not action at EUlevel could be appropriate or warranted to improve the market for disaster insurance in the EuropeanUnion." This process aims to expand the knowledge base, help to promote insurance as a tool of disastermanagement and to contribute to a shift towards a general culture of disaster risk prevention andmitigation, and to bring in further data and information." The questions raised for discussion in this Green Paper have to be seen in the context of stretchedgovernment finances in various member states (where a catastrophe event would pose further strains, e.g.EQ in GR). At the same time the banking sector is still fragile with credit and liquidity issues and theinsurance sector is under regulatory transition to Solvency II with increasing capital requirements.Simultaneously a new emphasis on product transparency, availability and effectiveness is emerging." With this Green Paper the EC will establish a clearer set of tools and their interaction for an effective riskmanagement of catastrophes.EU Green Paper10
EU Green Paper11" The impact of this EU initiative on the strategy of Risk Carriers is substantial." It defines new uses for Insurer’s Internal Models with impacts on multiple model domains.Use ofinternalModelsStrategy ofRisk CarriersShaping theadequacyandavailability ofappropriatedisasterinsuranceEUdevelopmentcooperationinitiativeCompulsory Nat CatInsuranceDisaster Insurance poolsProduct BundlingEU Principle 1Increasingmarketpenetration ofNat CatinsuranceGovernments & Reinsurersas last resortParametric Index basedweather insuranceLong term contractsContractual transparencyInsurance PricingEU Principle 2Increasingdisaster riskawareness,preventionand mitigationTerms & conditionsData, Research &InformationRisk Financing InitiativesEnvironmental Liability3rd Part Nuclear LiabilityOffshore oil and gasoperators liabilityEU Principle 3Reinforcinginsurance ofMan MadeDisastersInformation rights ofvictims…
Significant impact on internal models and their uses12Model Domains Level 1 Level 2EnvironmentStrategy• Uses• Domain of applicability• Model requirementsSpecifications• Risk measure• Risk factorOutcomescharacteristicsPerformance• Current circumstances• Range of applicabilitySoundness • Soundness of the outcomeModelMethodology• Architecture• Methodological choicesDevelopment• Data collection• Data treatments• Modelling & estimationTransferability &MaintenanceDocumentation• Quality• Archiving and versioningData sets & codes• Quality• Archiving and versioningUsage guidance• Parameter updates• Model runImplementationData flow• Coverage• Data controlSupporting System• Correctness and security• StorageOrganisation • Governance" When working with risk carriers RiskDynamics deploy a structured view ofour client’s models and their useacross their business" We perceive that the use of internalmodels will be funamentally impactedby some of the proposals in the GreenPaper" Therefore we highlight those modelareas in red where we feel that theymight be subject to model change ifproposals of the Green Paper wouldcome into practice
EU Green Paper13" Themes that Risk Dynamics covers with a joint response remain highlighted in blackUse ofinternalModelsStrategy ofRisk CarriersShaping theadequacyandavailability ofappropriatedisasterinsuranceEUdevelopmentcooperationinitiativeCompulsory Nat CatInsuranceDisaster Insurance poolsProduct BundlingEU Principle 1Increasingmarketpenetration ofNat CatinsuranceGovernments & Reinsurersas last resortParametric Index basedweather insuranceLong term contractsContractual transparencyInsurance PricingEU Principle 2Increasingdisaster riskawareness,preventionand mitigationTerms & conditionsData, Research &InformationRisk Financing InitiativesEnvironmental Liability3rd Part Nuclear LiabilityOffshore oil and gasoperators liabilityEU Principle 3Reinforcinginsurance ofMan MadeDisastersInformation rights ofvictims…
Appendix – the full questionnaire issued bythe European Commission’s Green Paper14
EU Questionaire Nat Cat (1/3)15Number Questions1 Penetration Rate• What is your view on the penetration rate of disaster insurance in the European Union? Please provide details and data to support yourarguments. Is more research needed to understand any possible gaps in insurance supply and demand, insurance availability and coverage?2 Product Bundling (issue is loss correlation, approach is increasing pool size or bundling of products)• What further action could be envisaged in this area? Would mandatory product bundling be an appropriate way to increase insurance coveragainst disaster risks?• Are there any less restrictive ways, other than mandatory product bundling, which could constitute an appropriate way to increase insurancecoverage against disaster risks?3 Compulsory disaster insurance• Which compulsory disaster insurance, if any, exists in Member States? Are these insurance products generally combined with compulsoryproduct bundling or obligation for insurers to provide cover? Is compulsory disaster insurance generally accompanied by a right for thecustomer to opt out of some disaster risks?• What are the advantages/possible drawbacks? Would EU action in this area be useful?4 Governments as (re)insurers and (re)insurers as last resort (issue of moral hazard, effective risk sharing)• How can state or state-mandated disaster (re-)insurance programmes be designed and financed to prevent the problem of moral hazard?5 Parametric index-based insurance and other innovationsDo you see any difficulties, barriers or limitations in using information to generate parametric insurance? Which factors could scale-up thepromotion and uptake of such innovative insurance solutions?6-8 Insurance pricing and market based principles to raise risk awareness• Could risk-based pricing motivate consumers and insurers to take risk reduction and management measures? Would the impact of risk-based pricing be different if disaster insurance was mandatory? Do insurers in general adequately adjust premiums following theimplementation of risk prevention measures?• Are there specific disasters for which flat-rate premiums should be suggested? Should flat-rate premiums be accompanied by caps on pay-outs?• What other solutions could be offered to low-income consumers who might otherwise be excluded from disaster insurance products?
EU Questionaire Nat Cat (2/3)16Number Questions9 Long-term disaster insurance contracts• Is there a case for promoting long-term disaster contracts? What would be the advantages/drawbacks for insurers and the insured personsrespectively?10 Pre- and contractual information requirements• Do you think there is a need to harmonise pre-contractual and contractual information requirements at EU level? If so, should the approachbe full or minimum harmonisation? What requirements concerning the commitment should be included, for instance:– the nature of the insured risks;– adaptation and prevention measures to minimise the insured risks;– features and benefits (such as compensation of full replacement costs, or depreciated, time value of assets);– exclusions or limitations;– details for notifying a claim, for instance, if both the loss and its notification must fall within the contract period;– who and to what extent bears the costs of investigating and establishing the loss;– contractual effects of a failure to provide relevant information by the insurer;– the remedies, costs and procedures of exercising the right of withdrawal;– contract renewals;– complaints handling?11 Insurance T&Cs (with a view on moral hazard)• Do deductibles, excesses co-insurance and other exclusions effectively prevent moral hazard? What alternative terms and conditions couldbe appropriate for disaster insurance, given that the insured party may be unable to take effective risk reduction measures against a disaster?
EU Questionaire Nat Cat (3/3)17Number Questions12-14 Data, Research and Information• How could data on the impacts of past disasters be improved (e.g., by using standard formats; improved access to and comparability ofdata from insurers and other organisations)?• How could the mapping of current and projected/future disaster risks be improved (e.g., through current EU approaches in flood riskmapping under the Floods Directive 2007/60/EC,29 civil protection cooperation30 and promotion of EU risk guidelines31)?• How could better sharing of data, risk analysis and risk modelling methods be encouraged? Should the available data be made public?Should the EU take action in this area? How can further dialogue between insurance industry and policymakers be encouraged in this area?15 Promoting risk financing initiatives across the EU• How can the Union most effectively help developing countries to create solutions for financial protection against disasters and shocks andwhat should be the priority actions? What types of partnerships with the private sector and the international institutions should be pursued forthis purpose?
EU Questionaire Man Made Cat (1/2)18Number Questions16-17 Environmental liability and industrial accidents• What are the most important aspects to look at when designing financial security and insurance under the Environmental Liability Directive2004/35/EC?• Are there sufficient data and tools available to perform an integrated analysis of relevant and emerging industrial risks? How can dataavailability, sharing and tool transparency be ensured? How can co-operation between insurers, business and competent authorities bestrengthened to improve the knowledge base of liabilitiesand losses from industrial accidents?No formalquestionThird party nuclear liability insurance• Article 98 of the Euratom Treaty stipulates that Member States are to ‘take all measures necessary to facilitate the conclusion of insurancecontracts covering nuclear risks’.• Legal cohesion across member states is required and still a long way in light of the EU requirement tot have insurance solutions in place.• Insurance against nuclear accidents is currently organised in national insurance pools (or by a national operators’ pool). Current issues are:limits, categories of damage (e.g., environmental damage), contract vs. impact periods (e.g., 30 years for damage to life and health).• The Commission is analysing this issue and will launch a public consultation shortly. Further steps may aim at the improvement of victimcompensation in case of nuclear accidents and at reducing differences in insurance amounts for nuclear power plants in different MemberStates.18 Offshore oil- and gas operatorsConsidering the specificities of the offshore oil and gas industry, what kind of innovative insurance mechanisms could be appropriate? Arethere ways for the insurance industry to reduce the uncertainty regarding the assessment of risks and calculation of premiums? What type ofinformation should be publicly available topromote the development of insurance market products to cover major accidents?19 Information rights of victims• Should contractual conditions of third-party liability insurance policies be disclosed to third parties in case of man-made disasters? If so,how?
EU Questionaire Man Made Cat (2/2)19Number Questions20 LOSS ADJUSTING• Are there specific aspects of loss adjusting which would benefit from more harmonisation? If so, which? Are there practical difficulties forloss adjusters to operate cross-border?21 GENERAL REMARKS• This paper addresses specific aspects related to the prevention and insurance of natural and man-made disasters. Have any importantissues been omitted or underrepresented?• If so, which?