Solvency II nat cat calculations a ‘backward step’, says Aon Benfield

The reinsurance broker has, in response, advised re/insurers to use a partial internal model to assign a more appropriate capital charge. 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 modelling support as re/insurers register internal models with the regulator and demonstrate how they are using advances in catastrophe modelling to obtain a more realistic picture of their risks.” 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 (SCR). However the methodology for the standardised scenarios for natural catastrophe modelling overlooks key data features, Aon Benfield said.hideThis includes location detail, with the CRESTA zone data currently used now considered insufficient. The use of CRESTA zone data in exposure calculations was common 15 years ago, but now most re/insurers, and all commercial catastrophe models, utilise far more detailed data. This means re/insurers could be relying on inaccurate data to establish their risk, resulting in higher capital requirements, the broker explained. Other weaknesses include a lack of differentiation by occupancy, residential, commercial or industrial, or construction, age and height and no application of limits and deductibles. The broker has also released its Monthly Cat Recap Report for October which reports that the month was dominated by significant flooding in Asia, Africa and Europe, the magnitude-7.7 earthquake and tsunami in Indonesia and Super Typhoon Megi hitting the Philippines as a Category 5 cyclone. October saw the second strongest non-tropical or post-tropical low pressure system ever recorded in the continental US, which brought severe weather, extremely gusty winds, torrential rains and heavy snows to much of the eastern US. At least 75 separate tornado touchdowns were confirmed, along with 521 separate reports of damaging winds. In Asia, monsoon rains and flooding left significant impacts to Indonesia’s West Papua, Vietnam, Thailand, Cambodia and Japan. The flooding events in Vietnam, Thailand and Cambodia combined to affect over 1.6 million homes and caused economic losses in excess of $1.03bn. The heaviest rains since 1961 in China’s Hainan province triggered floods that damaged or destroyed over 50,000 homes and other structures, which affected 2.7 million people. Total economic losses were listed at CNY1.13bn ($169m). Heavy rains and gusty winds in New South Wales, Australia led to the worst flooding in over 80 years in isolated locations of the state. Damage consisted primarily of roof damage and flooded homes and was estimated at AUD40m ($39m), most of which is expected to be covered by insurance. Super Typhoon Megi made two separate landfalls in the Philippines and China with winds gusting in excess of 325 kph (200 mph) and rains that triggered flash flooding and landslides. Substantial damage was caused to the agricultural, electrical and transportation infrastructures with total damages listed at PHP12.01 ($281m) in the Philippines and total economic losses of CNY2.8bn ($412m) in China. A powerful magnitude-7.7 earthquake rocked western Indonesia, triggering a large tsunami that left 431 people dead, 454 injured and 96 more missing. Water from the tsunami reportedly reached 600 metres (1,968 feet) inland, and damage reports indicated catastrophic effects occurred to nearly every infrastructure type on the remote Mentawai Islands. A trio of hurricanes hit the Caribbean. Hurricane Paula affected parts of the Caribbean and Cuba which knocked out electricity to much of Havana but damage reports were minimal. Hurricane Richard made landfall just south of Belize City and the National Emergency Coordinator listed overall economic losses from the event at BZD49.2m ($24.5m), with the agriculture sector sustaining 70% of the losses. The Caribbean Catastrophe Risk Insurance Facility reported that claims losses were anticipated to exceed $12.8m for Hurricane Tomas which impacted Barbados, St Lucia, St Vincent and the Grenadines. An additional $4m in economic damages was reported in east Trinidad. Steve Jakubowski, President of Impact Forecasting, said: “The breadth of natural catastrophes occurring this month is a continuation of an already active year in terms of global activity. The powerful earthquake and tsunami in Indonesia, the floods across Asia, Europe, Oceania and Africa, the tropical cyclones in the Atlantic, Pacific and Indian basins and severe weather across South America in October all highlight the need for re/insurers to keep informed on climatological and meteorological variances.”

Solvency II nat cat calculations a ‘backward step’, says Aon Benfield

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