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Solvency II nat cat calculation ignores 15 years of critical evolution, warns Aon Benfield
Broker advises on partial internal model for more accurate capital charges

LONDON, 4 November 2010 – Aon Benfield, the world’s premier reinsurance intermediary and capital advisor, is warning that natural catastrophe calculations are ignoring 15 years of critical evolution under the currently proposed Solvency II Standard Formula, which could lead to higher capital requirements for insurers when the regulation comes into force. In response, the intermediary is offering a suite of Solvency II-friendly services to help clients make the most of the catastrophe requirements, including advice on how re/insurers can use a partial internal model to assign a more appropriate capital charge.

Catastrophe risk is a key driver for capital under Solvency II, with the benchmark to withstand a 1-in-200 year event for natural and man-made disasters. There is a basic calculation method that insurers can use to determine their Solvency Capital Requirement. However the methodology for the standardized scenarios for natural catastrophe modeling overlooks key data features including:

• Location granularity (CRESTA zone data is insufficient)
• No differentiation by occupancy (residential, commercial or industrial) or construction, age and height
• Single damage function so no differentiation between buildings, contents and business interruption cover
• No application of limits and deductibles

The use of CRESTA zone data in exposure calculations was common 15 years ago, but now most re/insurers (and all commercial catastrophe models) utilize far more detailed data. This means re/insurers could be relying on inaccurate data to establish their risk, resulting in higher capital requirements.

In face of the new regulation and beyond, Aon Benfield is bringing its Impact Forecasting, catastrophe management, and actuarial capabilities together to offer support throughout the catastrophe risk process so re/insurers can better understand their risks, justify their views to regulators and reap the benefits of a partial internal model. These comprise:

1. Training on the drivers within catastrophe models
2. Model evaluation
3. Building transparent catastrophe models with Impact Forecasting
4. Data audits and benchmarking
5. ReMetrica, a dynamic financial analysis tool, to understand the impact of cat risks on capital.

Paul Miller, head of international catastrophe management at Aon Benfield, said: “The proposed Standard Formula for catastrophe is a disappointing backward step in catastrophe modelling. For the majority, the standard approach will be inappropriate or give unreasonable results as data quality and portfolio differentiators are totally ignored. The next two years are crucial for brokers to provide catastrophe modeling support as re/insurers register internal models with the regulator and demonstrate how they are using advances in catastrophe modeling to obtain a more realistic picture of their risks.”

Ends

About Aon Benfield
As the industry leader in treaty, facultative and capital markets, Aon Benfield is redefining the role of the reinsurance intermediary and capital advisor. Through our unmatched talent and industry-leading proprietary tools and products, we help our clients to redefine themselves and their success. Aon Benfield offers unbiased capital advice and customized access to more reinsurance and capital markets than anyone else. As a trusted advocate, we provide local reach to the world’s markets, an unparalleled investment in innovative analytics, including catastrophe management, actuarial, and rating agency advisory, and the right professionals to advise clients in making the optimal capital choice for their business. With an international network of more than 4,000 professionals in 50 countries, our worldwide client base is able to access the broadest portfolio of integrated capital solutions and services. Learn more at aonbenfield.com.
 

Media contacts

David Bogg
Aon Benfield
t: +44 (0)20 7522 4016
e: david.bogg@aonbenfield.com  

Andrew Wragg
Aon Benfield
t: +44 (0)20 7522 8183
e: andrew.wragg@aonbenfield.com      

Alexandra Lewis
Aon Benfield
t: +44 (0)20 7882 0541  
e: alexandra.lewis@aonbenfield.com

 

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