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Catastrophe Computer Modeling Handbook (2011)

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Catastrophe Computer Modeling Handbook (2011) Catastrophe Computer Modeling Handbook Catastrophe Computer Modeling Handbook Prepared by the CATASTROPHE INSURANCE WORKING GROUP of the PROPERTY AND CASUALTY INSURANCE (C) COMMITTEE November 2010 The NAIC is the authoritative source for insurance industry information. Our expert solutions support the efforts of regulators, insurers and researchers by providing detailed and comprehensive insurance information. The NAIC offers a wide range of publications in the following categories: Accounting & Reporting Statistical Reports Accountants, members of the insurance industry and Insurance industry data directed at regulators, educators, educators will find relevant information about statutory financial analysts, insurance industry members, lawyers accounting practices and procedures. and statisticians. Consumer Information Supplementary Products Consumers, educators and members of the insurance Accountants, educators, financial analysts, insurers, industry will find important answers to common questions lawyers and statisticians will find guidelines, handbooks, in guides about auto, home, health and life insurance. surveys and NAIC positions on a wide variety of issues. Financial Regulation Securities Valuation Office Accountants, financial analysts and lawyers will find Provides insurers with portfolio values and procedures handbooks, compliance guides and reports on financial for complying with NAIC reporting requirements. analysis, state audit requirements and receiverships. White Papers Legal Accountants, members of the insurance industry and State laws, regulations and guidelines apply to members educators will find relevant information on a variety of of the legal and insurance industries. insurance topics. NAIC Activities Insurance industry members will find directories, For more information about NAIC newsletters and reports affecting NAIC members. publications, view our online catalog at: Special Studies Accountants, educators, financial analysts, members of http://store.naic.org the insurance industry, lawyers and statisticians will find relevant products on a variety of special topics. © 2001, 2011 National Association of Insurance Commissioners. All rights reserved. ISBN: 978-1-59917-412-9 Printed in the United States of America No part of this book may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any storage or retrieval system, without written permission from the NAIC. NAIC Executive Office NAIC Central Office NAIC Securities Valuation Office 444 North Capitol Street NW, Suite 701 2301 McGee Street, Suite 800 48 Wall Street, 6th Floor Washington, DC 20001 Kansas City, MO 64108-2662 New York, NY 10005-2906 202.471.3990 816.842.3600 212.398.9000 Companion Products The following companion products provide additional information on the same or similar subject matter. Many customers who purchase the Catastrophe Computer Modeling Handbook also purchase one or more of the following products: Consumer's Guide to Earthquake Insurance Designed to educate consumers about the need to consider purchasing earthquake insurance. Helps consumers understand what earthquake policies cover and how they work. Also includes information on smart shopping strategies and steps to take in protecting homes. Illustrates the seismic risk the country faces and facilitates financial preparedness through an understanding of earthquake insurance. Final Report of the Earthquake Study Group Outlines the work of a group appointed to study the earthquake peril, specifically the differences between west coastal earthquakes and earthquakes in the central United States. Provides recommendations to help mitigate insurance losses caused by earthquakes. Identifies strategies to communicate loss-mitigation measures to insurers and consumers. NAIC Disaster Reporting Framework Suggests approaches and concepts to assist regulators in providing efficient and effective insurance regulation during a disaster. Provides guidance to help state insurance departments communicate a disaster-reporting effort to insurers, perform solvency and market conduct analysis on insurers, and streamline the process of gathering information from insurers to prevent duplicative data requests. The Potential Impact of Climate Change on Insurance Regulation Written under the assumption that global warming is occurring, this white paper provides an overview of climate change concerns related to insurance and insurance regulation. It presents issues faced by the various lines of business and ways regulators can mitigate these potential problems. Investment implications and opportunities, the government's role, and the importance of enhanced disclosure also are covered. State Disaster Response Plan Serves as a guide for state insurance regulators as they develop and adopt comprehensive disaster response plans. Represents the collective efforts of the NAIC membership to share best practices and learn from one another in effectively preparing for and reacting to catastrophic events. International orders must be prepaid, including shipping charges. Please contact an NAIC Customer Service Representative, Monday - Friday, 8:30 am - 5 pm CT. TABLE OF CONTENTS Section I Purpose and Background......................................................................................1 Purpose.........................................................................................................1 Background..................................................................................................1 Insurers’ Perspective........................................................................2 Catastrophe Modelers’ Perspective..................................................3 Consumers’ Perspective...................................................................3 Regulators’ Perspective...................................................................4 Section II Selected Catastrophe Perils...................................................................................7 Earthquake ...................................................................................................7 Hurricane......................................................................................................9 Section III General Overview of Catastrophe Models ........................................................11 Frequency and Severity..............................................................................11 Science Module..........................................................................................11 Engineering Module...................................................................................12 Insurance Module.......................................................................................12 Section IV Model Input Provided by Company...................................................................13 Section V Model Output .......................................................................................................15 Average Annual Losses .............................................................................15 Loss Costs ..................................................................................................15 Distribution of Losses................................................................................15 Exceeding Probability Distribution............................................................16 Individual Event Losses.............................................................................16 Historical Event Losses..............................................................................16 Section VI Model Validation and Update.............................................................................17 Accuracy ....................................................................................................17 Comparison to Historical Information.......................................................17 Convergence ..............................................................................................17 Expert Opinion/Peer Review.....................................................................17 Input Data Provided by Company..............................................................17 Logical Relationship to Risk......................................................................18 Model Updates...........................................................................................18 Probabilistic Range....................................................................................18 Real-Time Predictions...............................................................................18 Sensitivity ..................................................................................................18 Stability......................................................................................................18 Section VII Evaluating Models ...............................................................................................19 General Questions......................................................................................19 Questions Specific to Earthquake Modelers..............................................24 Questions Specific to Hurricane Modelers ................................................26 i Section VIII Regulatory Review and Acceptance...................................................................29 Section IX Related Activities, Activities to Consider,
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