Actuarial Notes

Uses of Catastrophe Model Output

By Extreme Events and Property Lines Committee of the American Academy of Actuaries · American Academy of Actuaries · 2018

Study guide: Exam GI-301

A July 2018 paper of the American Academy of Actuaries' Extreme Events and Property Lines Committee. It gives an overview of how catastrophe models have developed and demonstrates how catastrophe model output can be used in selected actuarial tasks, developing four use cases (ratemaking, loss mitigation, underwriting or risk selection, and reinsurance) for four types of event: hurricane wind, storm surge, inland flood, and tornado and straight-line wind.

On the syllabus

  • Exam GI-301 — Outcomes 8a-c; excluding the "Florida Commission on Hurricane Loss Projection Methodology" section on pp. 6, 7, 29-30 and 35, and all Appendices.

Executive Summary

Purpose

Introduction

History

Governance of Models

  • Actuarial Standards of Practice
  • Florida Commission on Hurricane Loss Projection Methodology
  • The National Association of Insurance Commissioners
  • Enterprise Risk Management

Model Overview and Components

Use Cases

Ratemaking

  • Determine Rate Level
  • Determine Risk Relativities and Rating Factors
  • Deductible Relativities
  • Geographic Location Relativities
  • Underwriting and Risk Selection
  • Loss Metrics for an Insured Property at an Individual Location
  • Portfolio Metrics

Mitigation

Reinsurance

  • Florida Hurricane Catastrophe Fund

Public Policy and Catastrophe Models

Advantages and Limitations of Historical Data and Catastrophe Models

  • Limitations of relying on historical data
  • Advantages of Using Catastrophe Models
  • Limitations of Catastrophe Models

Summary

Appendix 1: Hypothetical Policies and Model Settings

  • Construction of Hypothetical Policies
  • Model Settings

Appendix 2: 2017 Florida Hurricane Mitigation Measures

Appendix 3: Disclaimers

Sources