Page 13 - Life Insurance Today June 2015 SAMPLE

terrorism funding, and so forth, and to ensure that
customers are treated fairly.
An underwriting infrastructure also needs to be in place to
allow for the meaningful capture of data on the risks
underwritten. This is necessary to monitor concentrations,
meet any regulatory reporting requirements and have the
ability to manage the underwriting of individual accounts
to remain within agreed limits on aggregate
concentrations.
Concentration risk from insurance activities: The
insurance and reinsurance mechanisms work most
effectively when dealing with risks that are not correlated
with one another. By this we mean that the likelihood of
a claim occurring is not impacted by the fact that another
claim has occurred. In cases where risks are correlated
with one another, the (re)insurer must be cognizant of
potential concentration risk.
Concentration risk arises in multiple forms and is the area
where RM generally has the greatest involvement.
Concentration risk arises from systemic risks, stacking risk,
and clash risks. A particular form of systemic risk comes
from natural and man-made catastrophic exposure.
Systemic risk is the accumulation of losses triggered by a
single event or cause, affecting one or more industry
segments rather than a single risk. Asbestos is the classic
example of a systemic risk affecting multiple industries and
policyholders, lines of business and policy years. RM and
Underwriting need to ensure processes are in place to
identify similar potential risks and to monitor and
effectively control accumulations. A current risk with
potential systemic impact is nanotechnology.
Underwriting and RM need to determine the economic
risks, which lines of business might be exposed to loss (i.e., primarily from exposure to earthquakes, floods and
products liability, workers compensation), the likely
effectiveness of coverage restrictions in policy wordings,
the probability of different economic risk outcomes and the
aggregate limit to expose the enterprise.
Stacking is another aspect of concentration risk. Stacking
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refers to the accumulation of net (after reinsurance)
retentions within the same line of business on the same
insured. Here the risk arises, for example, from multiple
business units providing coverage for the same policyholder
plus participation in a reinsurance program from a
policyholder's reinsurance captive. Procedures such as a
name and location clearance system are typical ways to
prevent such an unintended accumulation.
Clash is a similar concentration risk that occurs when one
or more business units insure more than one line of business
for the same policyholder who could be affected by the
same claim or incident. This could lead to a higher than
intended aggregate loss. Reasonable foreseeability and a
large dose of common sense, together with an effective
name clearance system and an agreed exposure limit are
the keys for Underwriting and RM in managing these
exposures.
Exposure to systemic risk arises from both natural and man-
made catastrophic events. Monitoring and managing risk
accumulations requires detailed data (see below), models
and an underwriting infrastructure that spans all lines of
business and all business units that write policies in
potentially exposed locations. Critical from a RM
perspective is the ability to monitor accumulations across
lines of business and locations and to intervene when
aggregate limit boundaries are breached.
Mitigation actions might include simply abstaining from
additional underwriting commitments (or non-renewing
existing commitments upon expiry) or purchasing additional
treaty or facultative reinsurance for peak exposures. The
critical element is having the infrastructure to identify
unintended accumulations across multiple business units
and all lines of business.
The concentration risk of natural catastrophes arises
windstorms. Property damage and business interruption
accumulations are typically modeled by using sophisticated
commercial modeling tools (RMS, AIR, EQECAT, etc.).
Systemic risk also includes additional lines of business, such
as workers compensation, employers liability, accident and
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