Association Actuarielle Sino-française

Rating agencies, regulators and investors today are demanding that insurers provide detailed assessments of their risk tolerance

and quantify the adequacy of their economic capital. To complete such assessments requires a credible baseline for underwriting

volatility. In order to help our clients address these needs Aon Benfield Analytics began a detailed study of underwriting volatility in

2003 leading to this published Insurance Risk Study, now in its fourth edition. The Study provides our clients with an objective and

data-driven set of underwriting volatility benchmarks by line of business and country as well as correlations by line and country.

These benchmarks are a valuable resource to CROs, actuaries, and other economic capital modeling professionals who seek reliable

parameters for their models.

Using the factors in the Study as a complement to existing industry or proprietary frequency and severity curves, insurers can

assess the volatility of their business using the same metrics as catastrophe models. For example, it is possible to estimate the

aggregate loss potential over an accident year, both with and without the impact of the pricing cycle, analogous to catastrophe

model aggregate PMLs. These estimates can be calculated using Aon Benfield’s ReMetrica software.

The 2009 Study quantifies the systemic risk or volatility of each line of business for 26 countries that together comprise more

than 85 percent of global premium. Systemic risk in the Study is the coefficient of variation of loss ratio for a large book of

business. Coefficient of variation (CV) is a commonly used normalized measure of risk defined as the standard deviation divided

by the mean. Systemic risk typically derives from non-diversifiable risk sources such as changing market rate adequacy, unknown

prospective frequency and severity trend, weather-related losses, legal reforms and court decisions, the level of economic activity

and other macroeconomic factors. It also includes the risk to smaller and specialty lines of business caused by a lack of credible

data. For many lines of business systemic risk is the major component of underwriting volatility.