2020 Webinar - Don't Put All Your AALs in One Basket - May 7

Insurance risk pooling seeks to spread variability across a large number of independent risks. However, for insurers exposed to natural catastrophes, risks are not independent. Significant dependencies exist between individual policies, and surcharges may be warranted for those more correlated with an insurer’s portfolio.

In an environment that could include reinsurance cost pressure, property insurers seeking to improve results at the portfolio level may have increased incentive to accurately recognize and allocate reinsurance costs to individual policies.

Pricing a concentration charge is a longstanding theme within actuarial literature, but catastrophe models have enabled considerable improvements to traditional techniques. Catastrophe models are most often used to obtain estimates of average annual losses (AAL); but other model outputs at the event level are not as widely used.

Actuaries can utilize these model components to measure correlations between individual risks, and calculate concentration charges that are more granular and accurate than most rating plans reflect.

In this session, we will review traditional techniques for pricing the concentration charge, describe the data outputs of a catastrophe model, and provide examples of how the event level simulation output could be used by a primary insurer to accurately reflect its reinsurance cost at the territory level.