RMS V.11 Model May Mean Significant Increase for U.K. Insurers.
NU Online News Service, June 18, 1:32 p.m. EDT
Insurers in the United Kingdom may be hit with significant capital-requirement increases due to RMS catastrophe model version 11, says Willis Re.
RMS' U.K. windstorm and storm surge losses have increased following a combination of more small- and midsize events, a greater propensity for clustered losses, and vulnerability across all lines of business, Willis says.
Under the new model, insurers may see increases of up to 97 percent in capital requirements for catastrophe exposures under Solvency II rules.
"We believe that RMS V11 for the U.K. is unlikely to adequately reflect the nuances of all clients, and we therefore see it as our role to customize the view of risk to satisfy our clients' internal governance requirements and the increasing demands of external stakeholders," said Tim Edwards, author of the report, stating that insurers expressed "alarm" about the increases.
In its review, Willis Re states that it is happy with the update in hazard modeling, but that the reworked vulnerability modeling consistently over-estimates historical claims in the United Kingdom.
United Kingdom vulnerability functions increased for wind speeds above 32.5 meters per second [73 mph], causing a net impact of greater windstorm vulnerability in RMS version 11. The country's southern windstorm area has also been upgraded to 40 meters per second [89 mph], almost five times more vulnerable than parts of notoriously gusty Germany.
The Willis reports states that while the geographical difference is correct, an overall ratings increase is without merit due to RMS' limited sample of detailed client claims, Willis's belief that agricultural vulnerability was increased without sufficient backing data, and because vulnerability has not matched historical claims.
Out of 38 RMS-modeled losses in a Willis sample pool, 34 were greater than actual corresponding losses. The company has suggested an adjustment for modeled winds speeds from 20 [45 mph] to 42.5 meters per second [95 mph], customizable by line of business and a client's regional exposure distribution, limits and deductibles.
"Whilst we welcome this additional model feature, we believe that the Willis Re approach of calibrating the model to our clients' claims history is likely to lead to the most robust view," said Robert Rogers, Willis Re Regional Director UK and Ireland.
In regards to other changes, the analytics company said that the hazards of historical wind speeds are more closely represented by RMS V11 than by previous versions, and that changes in RMS 11 now captured the possibility of multiple events clustering together, which happened most notably in the 1990's but was not considered in RMS 10. The probability of second, third and subsequent events also increased in Version 11.
As a result, one client who was purchasing a property catastrophe program up to a one in 200 year event return period was now only purchasing cover up to the 160 year windstorm and storm surge return period, a 0.6 percent loss.
Clients seeking internal model approval under Solvency II must now demonstrate sufficient net capital requirements at the one in 200 year net aggregate exceedance probability level.
Still, Edwards said in a statement that the improved version requires re-calibration.
"RMS is one of the key providers of vendor models, which insurers can license to help assess the exposures within their portfolio to extremes of risk. When one of these providers changes the parameters of their models, it can have dramatic implications for the insurers who rely on their outputs."
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|Publication:||Property and Casualty 360|
|Date:||Jun 18, 2012|
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