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Most major (re)insurers will have exposure to catastrophic loss in their portfolios whether they participate in the alternative capital market or not. In order to understand this risk, many license third-party vendor catastrophe models. Milliman can assist (re)insurers in recognising the adjustments needed during the modelling process to ensure the modelled results better represent their specific book of business.
This process of “owning one’s own view of risk” when it comes to catastrophe models can take several forms. One option is to adjust the inputs in the models to better represent internal views on the vulnerability of the exposures in their portfolio.
Another alternative is to adjust catastrophe model outputs by blending the results of several catastrophe models and/or scenarios together or adjusting the modelled results at low return periods to better represent the historical experience of the specific cedent or book. Milliman can play an important role for (re)insurers that need additional experience and/or capacity to complete these initiatives. Working in tandem with reinsurers, their models, and their data, Milliman consultants deploy their experience to help clients develop their own, nuanced view of risk.
Catastrophe risk is often one of the major inputs into a (re)insurer’s internal solvency or capital models. These internal models, which have long been used internally to inform strategy, are increasingly being used by some domiciles to determine a company’s solvency requirement.
Milliman has extensive experience in reviewing and validating internal capital models, including the inputs and assumptions related to catastrophe risk. Milliman can help a client ensure that their models meet industry best practices in their theoretical structure, key assumptions, technical implementation, use within the company, and documentation.
Aaron Koch is a principal and consulting actuary with Milliman's Insurance-Linked Securities (ILS) Group, US P&C Division.
Karl is a principal and consulting actuary with Milliman. He joined the firm in 1999. He works primarily for Bermuda-based clients.