Downwards counterfactual analysis

Stress and scenario testing are important risk assessment tools.  They also provide useful ways to prepare in advance for adverse scenarios so that management doesn’t have to create everything from first principles when something similar occurs.

But trying to imagine scenarios, particularly very severe scenarios, isn’t straightforward. We don’t have many examples of very extreme events.

Some insurers will dream up scenarios from scratch. It’s also common to refer to prior events and run the current business through those dark days. The Global Financial Crisis is a favourite – how would our business manage under credit spread spikes, drying up of liquidity, equity fall markets, higher lapses, lower sales, higher retrenchment claims, higher individual and corporate defaults, switches of funds out of equities, early withdrawals and surrenders and increased call centre volumes?

Downwards counterfactual analysis is the: Continue reading “Downwards counterfactual analysis”

Move over cholera, here’s the Black Death

The Black Death, caused by the bacterium Yersinia pestis, wiped out 30 to 50 percent of Europe’s population between 1347 and 1351

Now, South Africa has been placed on high alert for a potential plague infection.

Mortality rates are estimated anywhere between 30% and 100% without treatment. Many estimates are towards the top end of this range, 80% to 95%. Treatments are available (mostly antibiotics) and are generally effective. Mortality rate where adequate treatment is administered within 24 hours can be 11%.  (Either “just 11%” or “11%!” depending on whether you’re counting up from 0% or down from 95%.)

Spread of Black Death across Europe in 14th century
Spread of Black Death across Europe in 14th century

Plague in Madagascar

124 people have already been killed by the plague in Madagascar. But this is just a particularly bad year. Continue reading “Move over cholera, here’s the Black Death”

Collective nouns for cats

In my ASSA convention presentation on systemic risk last week, I took pains to highlight the difference between real systemic risk and mere catastrophic claim risk or even concentration risk.

In this post I will cover these and other cats, the place of reinsurance including “feelings” and why this is hyper relevant for captives.

To demonstrate how even large general insurance catastrophes typically have no systemic implications for South Africa, I referenced the “2017 fire and storm claims”.

2017 Western and Southern Cape storm and fire claims

The media reported the following on these claims:

“Santam noted that the total insured damage has been estimated at around R3 billion, with economic losses (taking uninsured property into account) at significantly higher levels.

This was by far the worst catastrophe event in South African insurance history, with Santam client claims totalling around R800 million, of which R72 million related to the Cape Town property damage.”

So that all seems very intense. But then the story continues. Continue reading “Collective nouns for cats”

What is Systemic Risk?

Systemic risk is risk to the “system” in some way. In the financial services world, it is often defined in one of two ways:

Systemic risk can be defined in two ways
  • The risk of contagion, where failure of an entity leads to distress or failures of others [micro prudential]
  • The risk of an event that can trigger serious consequences for the real economy. [macro prudential]

Continue reading “What is Systemic Risk?”