Fifth Quantitative Impact Study of Solvency II (QIS5) Guidance on the implementation of Cresta Zones for the calculation of non-life

Natural Catastrophe risk in the SCR Standard Formula of QIS5

Introduction In relation to the calculation of the non-life Natural Catastrophe (NAT CAT) risk charge of the QIS5 SCR standard formula, the guidance is intended to set out how undertakings could fill in the required input data per cresta zone and per peril. The guidance is necessary since in the German market undertakings need to transform areas per LoB used in Germany into cresta zones per peril. To ensure a proper treatment of NAT CAT risk and to support the undertakings in applying this transformation appropriately, we intend to give guidance on the implementation of the cresta zones. This would minimise practical difficulties for the undertakings and ensure a harmonized treatment of NAT CAT risk for German undertakings. The guidance is consistent with the QIS5 technical specification since it aims at providing a suitable and harmonised allocation of sums insured to individual cresta zones in line with the definition of these zones as set out in the specifications. Scope According to the QIS5 Technical Specifications, the CAT risk sub-module under the standard formula should be calculated using one of the following alternative methods (or as a combination of both): Method 1: standardised scenarios Method 2: factor based methods

Nevertheless, undertakings using the standard formula should use method 1 for all exposures where possible. Where the application of method 1 is not possible undertakings should apply method 2 for the perils concerned. The non-life catastrophe standardised scenarios distinguish between Natural catastrophes or Man-Made Catastrophes. This guidance provides assistance to calculate the Catastrophe capital requirement for Natural catastrophes. Particularly, the following risks have to be considered in the NAT CAT risk module for Germany: Windstorm Flood

Earthquake Hail

When undertakings consider the standardised scenarios to appropriately capture the risks to which they are exposed, they can base their calculations on the Excel-Tool that accompanies the Technical Specifications. Completion of the Excel-Tool for NAT CAT risk For each of the perils considered (windstorm, flood, earthquake and hail) the completion of the Input Sheet of the Excel-Tool for NAT CAT risk requires the specification of total insured values of the lines of business affected for each of the 95 German cresta zones (first two digits of the postal code). In relation to the lines of business fire and other damage and motor property damage, the following specification should assist in completing the Input-Sheet: Fire and other damage The total insured value in relation to the individual perils could be determined as follows:
o

o o

Windstorm: total insured values for all insurance obligations that cover the risk of windstorm. This includes the household insurance, residential building insurance as well as industry building insurance. Earthquake and Flood: total insured value for all insurance obligations that cover the risk of natural hazards. Hail: The same as windstorm plus total insured values for risks of agricultural hail insurance covering crop damage and agricultural buildings.

Since the total insured values for these obligations are available in the granularity of the postal code, an aggregation to cresta zone is practically feasible. In cases where there is no regionally differentiated information available for industrial sites or the insurance of branches, the allocation to cresta zones should be based on the place of the head office. Motor property damage As no separation of the total insured values according to the type of damage (hail and flood) is possible, the total exposure should be entered in rows K and O. In analogy to fire and other damage, the total insured values should be filled in by cresta zone. However this information is typically not available for German undertakings, as o for these obligations the index is units per year (so called Jahreseinheiten)

there is a regionalization according to the district where the motor vehicle is licensed (so called Zulassungsbezirke) where a transition to cresta zones is non trivial.

To solve this, a table has been developed to facilitate the transition from data in the form of the Zulassungsbezirke to cresta zones according to the number of inhabitants. This table is attached below:

\\babfiler02a\ DatenVA\VA_public\Solvency_II\CEIOPS WG Pillar I\QIS5\National Guidance\CAT\Nat. Guidance_Germany_CAT_MPD Transition to Crest

Nevertheless, the data that has to be filled into the Input Sheet is required in the form of insured values rather then in units per year. For this reason, the units per year have to be multiplied with the average time value of the motor vehicles. The average time value of the insured motor vehicles can be approximated based on data provided by DAT (Deutsche Automobil Treuhand GmbH) and KBA (Kraftfahrt-Bundesamt). The following paragraphs describe how an approximate calculation of the time value of an average motor vehicle having a comprehensive insurance could be performed. This approximation separates between passenger cars, motorbikes and the remaining vehicles as this split should be available for the undertakings. According to the DAT report, the time value of a passenger car for the reference date 01.01.2010 can be set according to the following table, depending on the year when the car was initially registered: Year of initial registration 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 Time Value (Euro) 17.366 16.758 14.446 12.162 10.479 8.722 7.325 6.336 5.488 4.699 3.869 3.190 2.626

1996 1995 Total

2.184 1.797 7.998

Presuming a typical distribution of motor vehicles having a comprehensive insurance depending on the age of the vehicle and based on the assumption that the compensation will be the replacement value for the first year, this leads to the following averages: Comprehensive insurance Full coverage Partial coverage Total Share of motor vehicles 64 % 36 % Time Value (Euro) 11.274 4.508 8.838

Presuming a similar depreciation in value for non passenger cars, an approximate time value can be assessed based on an estimate on the original price for non passenger cars: Share of motor vehicles Passenger cars Motorbikes Remainders Total 82 % 5% 13 % Original Price 22.5201 10.000 100.000 31.966 Time Value(Euro) 8.838 3.925 39.250 12.546

With the help of these tables, undertakings can adjust the average time value of insured motor vehicles according to their portfolio in cases where this deviates from the typical distribution as assumed in the results as given above.

DAT-Report Autohaus, Neuwagenpreise 2009