1. This post will cover a brief summary of the capabilities of loss severity models (LSM)
2. We will look at how technology assists in identification and management of risk accumulations.
3. And to highlight the crucial validations and steps in the underwriting process.
LOSS SEVERITY MODELS TO MEASURE EXPOSURES
1. Insurers and reinsurers, alongside conventional methods, use statistical models to measure and manage loss severity exposure.
2. LSM identifies multi-line concentrations within a radius or geographic region.
3. LSM quantifies the greatest potential loss to the insurers’ portfolio (from policies with terrorism coverage.
4. LSM assists in pricing decisions and determining loss cost loads.
ENTERPRISE LEVEL
1. An integrated approach is required at the enterprise level as exposure data from different lines of business and operating units must be combined to understand the magnitude of total accumulations, and processes must be linked.
2. This is in order for underwriting decisions to be consistent with portfolio level objectives.
3. Therefore systems developed must identify accumulations at the portfolio and manage these accumulations during the underwriting process.
4. Analytical and guidance function requirements for IT systems should contain the following features:-
5. Automatically identify and track portfolio level accumulations
6. Provide geocoding for property risk aggregation
7. Provide precision on gross exposure, retention capacity and reinsurance cession
8. Provide exposure analysis based on terrorism zones and proximity of risk to such zones
9. Assess incremental impact of new risks on the gross and net exposure
10. Automatic validation and flagging of risks exceeding thresholds
11. Provide loss footprint for the development of scenario-based underwriting guidelines
RISK ACCUMULATION COMPUTATION
1. The computations may be complicated by impact from multiple endorsements on large risk policies, involvement of coinsurance and fronting among insurers.
2. Examples of complicating factors to the computation process are:
3. Varying inception and end dates of risks.
4. Large risks are often insured with packaged covers (package policies) hence impact multiple lines.
5. Multiple policies within the accumulation can go for endorsement simultaneously.
6. Some risks can be declined or policies can get cancelled.
7. Risks not in the same location but in the proximity may require attachment.
VALIDATIONS DURING THE UNDERWRITING PROCESS
1. What if an accumulation is identified while the underwriter is reviewing a quotation?
2. Before the underwriter provides a quote, the following validations can be set into the system:
3. Whether the location-wise exposure limit allows acceptance
4. Available reinsurance capacity on accumulated risk
5. Requirement of facultative placement, if any
6. If facultative placement is required, has that been confirmed by the reinsurer?
VIEWS
1. The key is to monitor accumulations across businesses and locations, and to intervene when aggregate limit boundaries are breached.
2. To support the practice, the critical element lies in having the infrastructure to identify unintended accumulations across multiple business units and all lines of business.
3. This concentrations of accumulation can be quickly identified and quantified.
4. But not forgetting that the process is repetitive and gets complicated as more and more risks are added to the portfolio.
