09The Fac Report - Aon

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THE DPO DIFFERENCE Benfield’s Dynamic Portfolio Optimisation (DPO) is unique in that it addresses the correlation of risk through concentration. Accordingly, DPO-designed strategies quantify the impact on the entire PML curve, identifying the policies that have the most negative impact on results at the portfolio level. By contrast, other optimisation strategies tend to identify a portfolio’s ‘worst’ policies on an individual basis without taking into account how those policies correlate to the remaining portfolio. As a result of this difference, DPO can assist underwriting entities to significantly enhance their strategic exposure management. Applications include identifying both the key risk drivers within property portfolios and areas that could be profitably written without a significant effect on PMLs. DPO also analyses the impact of potential changes to a portfolio in terms of what this would mean for reinsurance limits required, for the cost of reinsurance to be purchased and for the company’s retained net average annual loss. DPO IN BRIEF MODELS USED: RMS, AIR, or a blend of these models. PERILS: Hurricane and/or Earthquake. RISK APPETITE: Specific return time (e.g. 100-year) selected by the company. PROFITABILITY METRIC: Including or excluding non-catastrophe loss ratios. UNDERLYING REINSURANCE: Quota Share, Per Risk, Facultative and the Florida Hurricane Catastrophe Fund. KEY RISK DRIVER CANDIDATE RESTRICTIONS: Flexible identification of policies, e.g., personal lines policies only, avoiding profitable agencies, or excluding policies with supporting business, etc. GROWTH POLICY CANDIDATES: Prospective new portfolios, policies similar to the current portfolio, or standard sample policies. In addition to customising analysis parameters and policy selections, reports can be tailored to include detailed policy lists summarised by state, county, territory, or line of business, or can be profiled for underwriting purposes. Results can be shown as maps or used to generate impact scenarios for reinsurance cost. FINDING FRESH ANGLES IN SOFT MARKETS The need to optimise reinsurance structures and costs in a soft market is prompting insurers to use risk concentration modelling and analysis as a tool for businesses to identify growth opportunities within existing treaty structures. Examples of recent US projects have included analysing how books of construction risks could be rebalanced to provide a fresh approach for growth, and exploring potential strategies under which personal lines carriers – with multiple companies operating under different pricing structures – could grow the quality of their business by identifying where best to focus activity. Underpinning such initiatives has been the combined use of Dynamic Portfolio Optimisation (DPO) modelling, which looks at the concentration of risks within portfolios, and CatFac analysis. This duo creates the analytical groundwork from which to identify where growth can be achieved within existing PMLs. It can be accomplished by employing a dual strategy that focuses on underwriting of particular types of business while using facultative reinsurance to remove exposure ‘hot spots’. This reflects the fact that the combined analytical process enables key exposure drivers first to be isolated, allowing very specific facultative reinsurance mechanisms to be structured to meet the particular needs of the portfolio. Given the tailored nature of facultative reinsurance, high levels of flexibility can be achieved using mechanisms ranging BENFIELD FACULTATIVE SOLUTIONS NEWSLETTER | SPRING 2008 | ISSUE 09 | PAGE 04 from automatic, to pre-agreed rating agreements, to facilities. Other applications for DPO/CatFac combined analysis include helping with the development of strategies for shared and layered business by understanding how best to build up portfolios through selective underwriting. In this context, facultative reinsurance acts as a tool to keep retentions on each layer within the predetermined plan. The DPO/CatFac methodology can also be used to better test assumptions in terms of the overall cost benefit of particular elements of their business when viewed in relation to wider capital considerations. The current interest in Benfield’s DPO/CatFac capabilities is a testament to the flexibility of the tool, which first came to the forefront as a mechanism to tackle hard markets. In that scenario, the DPO/CatFac combination was used to identify the policies, and the locations within those policies, which were disproportionately driving PML curves for a given annualised event probability. The analysis was used to reinsure, on a facultative basis, such business on concurrent terms and conditions. Reflecting the potential value of such analysis, in one example, which was based on a portfolio’s 1:250 PML loss, some 5% of the portfolio’s multi location commercial property policies were found to be driving 25% of the loss. sherry.thomas@us.benfieldgroup.com
CREATING A CLEARER PICTURE FOR UNDERWRITERS Following its success with US underwriters, Benfield has now started to roll out ExposureView, to a more international audience. As the first stage in this process, Benfield has established a London-based hub for the product which is working with a number of London Market companies on initiatives to enhance the depth of their US underwriting data. A market leading exposure management tool which uses geographic information systems to create a physical picture of risks and their accumulations, ExposureView has been in use by US insurers since 2003 as a key technology to visualise the potential impact of catastrophe events such as wind, terrorism or wildfire on their portfolios both during and after an event. Originally developed to provide US insurers with daily updates of wildfires, the system has now become a valued underwriting tool and can be used with a wide range of data including personal and commercial property, auto business, workers compensation risks and offshore platforms. Key to ExposureView’s success is that it not only enables underwriters to plot and view all individual risks – whether by street address or a specific latitude/longitude – but also overlays such information with ‘hazard shapes’ or polygons that outline the boundaries and impact of events. BENFIELD FACULTATIVE SOLUTIONS NEWSLETTER | SPRING 2008 | ISSUE 09 | PAGE 05 Equally important, from an underwriting perspective, the system also enables insurers both to view specific risks and to see how potential new risks would fit with the overall balance and underwriting limitation of existing portfolios. For instance, where necessary, radius-based exclusion zones can be plotted in conjunction with specific risks, to ensure accumulation limitations are maintained, e.g., when underwriting terrorism risks. The map-based output from the system has also been highly valuable to claims’ teams for use in deploying adjusters and managing and analysing claims. One of the key features of ExposureView, in addition to the system’s mapping capabilities, is the way in which it enables underwriters, at the touch of a button, to retrieve their data in spreadsheet format. This facility provides instant access to the necessary information to manage, analyse and evaluate claims, enabling underwriters to produce swift exposure evaluations in the wake of a major event. In order to maximise the value of this application, underwriters can, if required, take a highly selective approach to retrieving data, far beyond class of business. Examples include the ability to isolate information on beachfront properties or those that are of a wooden construction type. The system’s current library of information includes a wide range of data including maps of hurricane wind speeds from past events, footprints of past windstorm events, data on various US earthquake zones and also a terrorism target database. In addition, it can also be used to visualise the impact of Lloyd’s Realistic Disaster Scenarios. Whilst the system’s Benfield-sourced library of hazard shapes at present principally focuses on US exposures, the system has mapping availability for 63 countries. Given users can tailor the system by incorporating their own libraries of hazard shapes, this also means the system has applications as a base from which insurers can build highly tailored exposure modelling tools, which reflect the particular geographical priorities of their own businesses. All user information, including personal libraries of event information, is only accessible to the user in question, to maintain full confidentiality. dave.barthorpe@benfieldgroup.com paul.budde@benfieldgroup.com Readily accessible with a web browser and an internet connection, ExposureView is part of the value-added, innovative services and technology that Benfield provides to its customers. For further information, go to www.benfieldremetrics.com. Wilma 2005 wind speed forecasts
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09The Fac Report - Aon

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