6/17/21 Virtual Meeting CATASTROPHE INSURANCE

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Date: 6/17/21 Virtual Meeting CATASTROPHE INSURANCE (C) WORKING GROUP Monday, June 21, 2021 2:30 p.m. ET / 1:30 p.m. CT / 12:30 p.m. MT / 11:30 a.m. PT ROLL CALL Mike Chaney, Chair Mississippi Jerry Condon/Matthew Mancini Massachusetts James A. Dodrill, Vice Chair West Virginia LeAnn Cox Missouri Jimmy Gunn/Brian Powell Alabama Carl Sornson New Jersey Katie Hegland Alaska Timothy Johnson North Carolina Jimmy Harris Arkansas Tom Botsko Ohio Lynne Wehmueller California Cuc Nguyen Oklahoma George Bradner Connecticut David Dahl/Ying Liu/Van Pounds Oregon David Altmaier Florida David Buono Pennsylvania Colin M. Hayashida Hawaii Beth Vollucci Rhode Island Judy Mottar Illinois Will Davis South Carolina Travis Grassel Iowa David Combs Tennessee Heather Droge Kansas Mark Worman/J’ne Byckovski Texas James J. Donelon Louisiana David Forte Washington Joy Hatchette Maryland NAIC Support Staff: Sara Robben AGENDA 1. Discuss Referral from the Climate and Resilience (EX) Task Force— Attachment One Commissioner Mike Chaney (MS) 2. Discuss Any Other Matters Brought Before the Task Force —Commissioner Mike Chaney (MS) 3. Adjournment W:\National Meetings\2021\Summer\Cmte\C\CatWG\0621 Agenda.docx 1 Referral from Climate and Resiliency (EX) Task Force MEMORANDUM TO: Catastrophe Insurance (C) Working Group of the Property and Casualty Insurance (C) Committee FROM: Raymond G. Farmer (SC), Co-Chair of the Climate and Resiliency (EX) Task Force Ricardo Lara (CO), Co-Chair of the Climate and Resiliency (EX) Task Force James J. Donelon (LA), Co-Vice Chair of the Climate and Resiliency (EX) Task Force DATE: May 24, 2021 RE: Proposed Changes to the Catastrophe Computer Modeling Handbook In 2020, the NAIC formed the Climate and Resiliency (EX) Task Force, with five workstreams to assist in carrying out the charges of the Task Force. The Technology Workstream was charged with applying technology, such as early warning systems and predictive modeling tools, to understand and evaluate climate risk exposures. The Catastrophe Insurance (C) Working Group developed the Catastrophe Computer Modeling Handbook (Catastrophe Handbook) in 2010 with the purpose “to explore in some detail catastrophe computer models and to discuss issues that have arisen or can be expected to arise from their use.” Further, the Catastrophe Insurance (C) Working Group has a charge to provide a forum for discussing various issues related to catastrophe modeling, and monitor issues that will result in changes to the Catastrophe Handbook. The Technology Workstream of the Climate and Resiliency (EX) Task Force met in an open meeting on May 7 to discuss the need for revisions to the Catastrophe Handbook. The Technology Workstream requests that the Catastrophe Insurance (C) Working Group consider the need for revisions to the Catastrophe Handbook. During its open meeting, the Technology Workstream discussed several updates for the Working Group to consider. First, the purpose of the Handbook, “to explore in some detail catastrophe models and to discuss issues that have arisen or can be expected to arise from their use,” should be revisited to develop an understanding of how the Catastrophe Handbook is used currently and determine its practical use within the regulatory toolkit. Furthermore, the work should be coordinated with the Catastrophe Risk (E) Subgroup to understand the materials it is developing or otherwise making available to state insurance regulators regarding catastrophe models. Second, the Catastrophe Handbook is currently limited to earthquake and hurricane. Catastrophe models have evolved to include many additional perils, which should be recognized in the revised Catastrophe Handbook. The questions for evaluating models in © 2021 National Association of Insurance Commissioners Section VII of the Catastrophe Handbook are of particular interest and should be updated to, at a minimum, include the wildfire questions described in the Application of Wildfire Mitigation to Insured Property Exposure. 1 The Working Group should consider questions specific to additional perils for which there are catastrophe models in use today including, but not limited to, flood. Furthermore, the questions should be denoted to clarify which should be directed to insurers versus catastrophe modelers. Third, the Technology Workstream suggests the Working Group explore which catastrophe modelers have begun including climate data in their models. As model versions are updated regularly and advancements continue to evolve in this area, the Working Group should consider alternative formats for the Catastrophe Handbook to make more recent information available or otherwise consider more frequent updates to be made in the future. Finally, it was noted during the Technology Workstream’s meeting on May 7 that the American Academy of Actuaries (Academy) has developed guidance and education on catastrophe models, which the Working Group may wish to explore. Since the Working Group is already charged to consider updates to the Catastrophe Handbook, a response to the Technology Workstream is not necessary. However, we welcome any questions or comments you may have about the request. Please direct questions or comments to Jennifer Gardner (NAIC) at [email protected]. 1 NAIC Center for Insurance Policy and Research, Risk Management Services, and Insurance Institute for Business and Home Safety, Application of Wildfire Mitigation to Insured Property Exposure, November 2020, https://content.naic.org/sites/default/files/cipr_report_wildfire_mitigation.pdf © 2021 National Association of Insurance Commissioners 2 Catastrophe Modeling Handbook Presentation ASOP 56 - Modeling Actuarial Standard of Practice No. 56 Modeling Developed by the Modeling Task Force of the General Committee of the Actuarial Standards Board Adopted by the Actuarial Standards Board December 2019 Doc. No. 195 ASOP No. 56—Doc. No. 195 T A B L E O F C O N T E N T S Transmittal Memorandum iv STANDARD OF PRACTICE Section 1. Purpose, Scope, Cross References, and Effective Date 1 1.1 Purpose 1 1.2 Scope 1 1.3 Cross References 2 1.4 Effective Date 2 Section 2. Definitions 2 2.1 Assumption 2 2.2 Data 2 2.3 Governance and Controls 2 2.4 Hold-out Data 2 2.5 Input 2 2.6 Intended Purpose 2 2.7 Intended User 3 2.8 Model 3 2.9 Model Risk 3 2.10 Model Run 3 2.11 Output 3 2.12 Overfitting 3 2.13 Parameter 3 Section 3. Analysis of Issues and Recommended Practices 3 3.1 Model Meeting the Intended Purpose 3 3.1.1 Designing, Developing, or Modifying the Model 3 3.1.2 Selecting, Reviewing, or Evaluating the Model 4 3.1.3 Using the Model 4 3.1.4 Model Structure 4 3.1.5 Data 4 3.1.6 Assumptions Used As Input 4 3.2 Understanding the Model 6 3.3 Reliance on Data or Other Information Supplied by Others 6 3.4 Reliance on Models Developed by Others 6 3.5 Reliance on Experts 6 3.6 Evaluation and Mitigation of Model Risk 7 3.6.1 Model Testing 7 3.6.2 Model Output Validation 8 3.6.3 Review by Another Professional 8 3.6.4 Reasonable Governance and Controls 8 3.6.5 Mitigating Misuse and Misinterpretation 8 ii ASOP No. 56—Doc. No. 195 3.7 Documentation 8 Section 4. Communications and Disclosures 9 4.1 Required Disclosures in an Actuarial Report 9 4.2 Additional Disclosures in an Actuarial Report 9 4.3 Confidential Information 9 APPENDIXES Appendix 1—Background and Current Practices 10 Appendix 2—Comments on the Fourth Exposure Draft and Responses 12 iii ASOP No. 56—Doc. No. 195 December 2019 TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in Modeling FROM: Actuarial Standards Board (ASB) SUBJ: Actuarial Standard of Practice (ASOP) No. 56 This document contains ASOP No. 56, Modeling. History of the Standard The ASB first began work on a standard for modeling in the late 1990s. Motivated primarily to address the role catastrophe modeling of earthquakes and hurricanes played in casualty ratemaking, this work was focused on the use of specialized models where actuaries would have to rely on a model that was developed by professionals other than actuaries. As a result of this work, ASOP No. 38, Using Models Outside the Actuary’s Area of Expertise, was approved by the ASB in June of 2000 with the scope of the standard limited to the Property/Casualty area of practice. Historically, ASOP No. 38 had been the only ASOP that specifically addressed modeling. Recently, the number and importance of modeling applications in actuarial science have increased, with the results of actuarial models sometimes being reflected in financial statements. Recognizing this trend, the ASB asked the Life Committee in 2010 to begin work on an ASOP focused on modeling. The Life Committee formed a task force to address this issue and, in February of 2012, a discussion draft titled Modeling in Life Insurance and Annuities was released and nineteen comment letters were received. The transmittal letter also mentioned that the scope might be expanded to all practice areas and asked for comments on this idea. Based upon the feedback received, and numerous other discussions on the topic of modeling, in December of 2012 the ASB created two multi-disciplinary task forces under the direction of the General Committee: i) a general Modeling Task Force, charged with developing an ASOP to address modeling applications in all practice areas, and ii) a Catastrophe Modeling Task Force to consider expanding ASOP No. 38 to all practice areas while focusing exclusively on using catastrophe models. The membership of these task forces has experience in all actuarial practice areas, including enterprise risk management. First Exposure Draft The first exposure draft was released in June 2013 with a comment deadline of September 30, 2013. Forty-eight comment letters were received and considered in making changes that were reflected in the second exposure draft.
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