QIS5 Natural Catastrophe Scenarios within Range of Industry Models, According to Guy Carpenter’s Solvency II Update
As part of its Solvency II update published today, Guy Carpenter & Company, LLC, the leading global risk and reinsurance specialist and a part of the Marsh & McLennan Companies (NYSE: MMC), analyzed the industry-wide impact of the natural catastrophe scenarios provided in QIS5, the European Commission’s fifth and most recent Quantitative Impact Study.
Guy Carpenter was part of an industry task force charged with the development of standardized European scenarios for all major perils that would be suitable for both regional and global re/insurers. To help clients prepare for Solvency II, Guy Carpenter also conducted its own independent analysis to measure the industry-wide impact of these scenarios and determine whether they are in line with current industry assumptions. The scenarios include windstorm, flood, earthquake, hail and subsidence. The task force proposed parameters seeking to define each catastrophe scenario at a level corresponding to a 1-in-200 year loss.
- On an aggregate level, the QIS5 scenarios were found to be roughly within the range of current industry models.
- Most insurers will likely need to make adjustments to optimize their positioning and operations under the Solvency II regime.
- In many European countries, the current market reinsurance limit, including catastrophe bonds and comparable structures, is below the amounts suggested by the QIS5 scenarios. On average, companies buy reinsurance below the recommended 1-in-200 return period in most countries.
The briefing also contains several illustrations, including a chart depicting the impact of a synthetic catastrophe excess-of-loss (XoL) reinsurance program on a QIS5 wind scenario as well as a graph showing that the loss projections computed with PERILS AG data under the QIS5 scenarios fall within the range of the three vendor models.
The study undertaken by Giy Carpenter looking at European windstorm loss analysis compares the QIS5 windstorm scenario property loss estimates that PERILS AG created using its 2010 Industry Exposure Database with other available models. Guy Carpenter compared the PERILS results with vendor models from RMS, AIR Worldwide and EQECAT. They found that PERILS loss projections fall in the range of the vendor models with a tendency towards conservatism.
Looking specifically at the amount of reinsurance required to meet the model scenarios Guy Carpenter says ‘the current market reinsurance limit (including cat bonds and comparable structures) is below the amounts suggested by these scenarios.’
Read the full report from Guy Carpenter here.