March 30th, 2016

Risk Analytic Tools, Part II

Posted at 1:00 AM ET

In addition to internal risk management, models are typically used in risk transfer negotiations. Both traditional and alternative risk markets require extensive analysis of portfolios when considering risk transfer. Sharing a portfolio’s standardized model output is critical to imparting the loss potential of a particular portfolio from which risk-capital can be unlocked to support the risk financing needs of a reinsurance buyer. Using technology is critical when partnering governments with the private sector. Whether partnering with developed or emerging economies, these tools bring together the risk knowledge and historical data of the public sector with risk management techniques of the insurance industry. The result is an enhanced understanding of risk that provides stability and attracts partners.

The issues and attention to US flood and the National Flood Insurance Program (NFIP) data crystalizes the value of this kind of partnership. Risk and claims data from NFIP can be used to refine first generation quantitative tools that measure flood risk, and in the process unlock more private sector risk-capital to support the risk management needs of the NFIP.

Academic institutions also have intellectual resources and tools to assist with mapping and building actuarially respected models. For example, the Florida Office of Insurance Regulation funded a team of experts from five in-state universities, the National Oceanic and Atmospheric Administration and the National Institute of Standards and Technology, to build, test, calibrate, validate and provide independent review of the Florida Hurricane Public Loss Model.

The work that Guy Carpenter has done for the Federal Emergency Management Agency Flood Insurance Risk Study (FIRS) in the United States shows the potential benefits of collaboration in developed countries to construct solutions for more sustainable flood insurance protection. NFIP policy and claims data was provided to build feasibility studies for NFIP privatization. Probabilistic flood and storm surge modeling was combined with non-modeled aspects of NFIP claims. Using actuarially sound techniques, Guy Carpenter projected the long term financial position of the NFIP reflecting the impact of reforms on future revenue and the program’s deficit with and without reinsurance. The participation of the entities that have the capabilities to evaluate, construct and support complementary product offerings or risk financing solutions for the NFIP will be critical to developing sustainable public-private flood solutions in the United States. Collaboration brings expert technology and best practices from a variety of sources to develop short- and long-term solutions for the overall benefit of society.

Link to Part I>>

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