5.2.4 Calculation of Catastrophe risk charges

5.2. Insurance Risks

L1-104. Catastrophe risk is a risk that affects both life and non-life business. The Catastrophe risk charge covers risks associated with low frequency, high severity events occurring at any point in time in the next 12 months and takes into account all expected in-force business when the event occurs.
L1-105. Risk mitigation arrangements (eg outwards reinsurance protection purchased) may reduce the overall Catastrophe risk charge.
L1-106. Catastrophe risk is segmented at the risk/peril level. Perils cover both naturally occurring perils (natural catastrophes) and man-made perils/scenarios (other catastrophes) and their consequences.
L1-107. The impact of catastrophe claim events include not only the main peril (eg windstorm, earthquake) but also the secondary perils associated with the primary peril. Secondary perils can affect all lines of business within the scope of the calculation.
L1-108. The perils, scenarios and allowable risk mitigation, along with prudential safeguards for the use of models to calculate the natural catastrophe risk charge, are specified in the Level 2 text.

L2-181. When calculating the Catastrophe risk charge, all lines of business exposed to Catastrophe risk are considered. To avoid double counting with the other ICS risk charges, the following principles are applied:
- a. Life and similar to life health business are included only for the pandemic and the terrorism scenarios; and
- b. The impact on financial markets and the whole economy (Market and Credit risks) is not included in the calculation of Catastrophe risk.

L2-182. The perils covered by Catastrophe risk are:
- a. Natural catastrophe:
  - i. Tropical cyclone, hurricane, typhoon;
  - ii. Extra-tropical windstorm/winter storm;
  - iii. Earthquake; and
  - iv. Other material natural perils, such as:
    - • Flood; • Tornado, hail, convective storms; • Other risks.
- b. Other catastrophes (Man-Made Perils/Scenarios):
  - i. Terrorist attack;
  - ii. Pandemic; and
  - iii. Credit and Surety.
L2-183. The impact of catastrophe claim events include both the main peril and any secondary perils associated with the main peril.

L2-184. Stochastic catastrophe models may be used to calculate loss amounts resulting from natural catastrophe events.
L2-185. Loss amounts are calculated considering:
- a. The impact of natural catastrophe on all lines of business affected;
- b. An allowance for non-modelled exposures including expected new business over the target time horizon of one year that could be affected by the listed perils; and
- c. An allowance for non-modelled perils and regions reported as part of the other natural catastrophe losses. This may include perils and regions that are not modelled individually or specifically but for which potential losses are assessed using other approaches.
L2-186. The natural catastrophe risk charge is the difference between the 99.5th percentile and the mean of the total annual aggregate losses, net of protections. The annual aggregate losses are calculated as the aggregation of losses across all regions and perils.

L2-187. The loss amounts for the following perils are determined according to the scenarios described below.
L2-188. The impact of the scenarios is calculated for all lines of business affected by the respective scenario, unless otherwise specified in the scope of the calculation.

L2-189. The risk charge is the sum of the losses from the following two components:
- a. Total loss of property (including building, content, motor vehicles) from insurance contracts and the impact on other insurance contracts resulting directly from the loss of property; and
- b. The losses from life insurance contracts, health coverage and workers’ compensation.
L2-190. For both the life and non-life components, the scenario is a five-tonne bomb blast for the largest geographical risk concentration partly or fully located within a radius of 500 metres. To determine this concentration, all buildings (including properties for own use) are considered. The largest concentration is determined separately for the life and non-life components.
L2-191. For property damage, including insured properties and related covers, the following assumptions are made:
- • 100% damage ratio within a circular zone of a 200 metre radius;
- • 25% damage ratio for the next circular zone up to a 400 metre radius; and
- • 10% damage ratio between 400 and 500 metres. L2-192. For fatalities, the following assumptions are made:
- • 15% fatality rate within a circular zone of a 200 metre radius; and
- • 1.5% fatality rate between 200 and 500 metres.
L2-193. For disabilities, the following assumptions are made:
- • 20% disability rate within a circular zone of a 200 metre radius; and
- • 10% fatality rate between 200 and 500 metres.

L2-199. For the purpose of calculating the Catastrophe risk charge, the other catastrophe scenarios are assumed to be mutually independent and independent of the natural catastrophe perils. Consequently, the total ICS catastrophe capital charge will be calculated as follows:

ICS_Cat

\sqrt{ICS_{NatCat}^2 + ICS_{Terror}^2 + ICS_{Pand}^2 + ICS_{credit}^2}

L2-200. The recoverable amount is calculated as the difference between the risk charge for Catastrophe risk calculated as if the risk mitigation arrangements did not exist, and the risk charge for Catastrophe risk calculated taking into account qualifying risk mitigation arrangements.
L2-201. The recoverable amount is allocated by credit rating categories, using the following steps:
- a. For the aggregate of the Natural Catastrophe risk and for each Other catastrophe scenario, calculate the recoveries by rating class and the gross and net losses;
- b. Aggregate all gross and net losses using the aggregation approach described above. The difference between aggregated gross and net losses is the total recoverable; and
- c. The recoverable by rating class is equal to the total recoverable multiplied by the ratio of the sum over all scenarios of the recoveries in that rating class to the sum over all scenarios of the recoveries for all rating classes.

L2-202. In order to assess the appropriateness of stochastic natural catastrophe models, the IAIG provides information on the following safeguards.