Aon Benfield says Solvency II natural catastrophe calculations are outdated

Aon Benfield has stated in a press release today that the formulas for calculating natural catastrophe capital requirements under the proposed Solvency II Standard Formula are outdated and ignore 15 years of evolution in the field of risk modelling. In response they are offering a suite of services to help re/insurers make the most of the catastrophe requirements.

The basic calculation methodology being used under Solvency II overlooks these key aspects of risk and data modelling says Aon:

• Location granularity (CRESTA zone data is insufficient)
• No differentiation by occupancy (residential, commercial or industrial) or construction, age and height
• Single damage function so no differentiation between buildings, contents and business interruption cover
• No application of limits and deductibles

CRESTA zone data is still used for risk modelling but usually in combination with more detailed data today. Aon says using CRESTA zone data alone is akin to modelling as it was done 15 years ago and to use it on its own today is essentially ignoring 15 years of evolution in the field.

Paul Miller, head of international catastrophe management at Aon Benfield, said: “The proposed Standard Formula for catastrophe is a disappointing backward step in catastrophe modelling. For the majority, the standard approach will be inappropriate or give unreasonable results as data quality and portfolio differentiators are totally ignored. The next two years are crucial for brokers to provide catastrophe modeling support as re/insurers register internal models with the regulator and demonstrate how they are using advances in catastrophe modeling to obtain a more realistic picture of their risks.”