Canadian P&C industry over-relying on use of one vendor-provided catastrophe model: KPMG study

There is a potential systemic risk in the use of catastrophe models in Canada because of the property and casualty industry’s “extensive reliance on vendor-provided catastrophe models, particularly with extensive reliance on one vendor in Canada,” KPMG says in research contracted by the Insurance Bureau of Canada (IBC).
Rachel Dutil of KPMG LLG shared preliminary findings of the research at the 2010 IBC Financial Affairs Symposium held in Toronto.
Setting the context, she cited research that notes the same kind of systemic risk exists in the Bermuda marketplace. “We believe the potential for systemic risk is greater in Canada, where there is tremendous reliance on one model, which is RMS,” Dutel said.
IBC contracted KPMG in late fall of 2010 to conduct research to develop and document best practices for Canadian P&C insurers in managing and modeling catastrophe risks. KPMG is expected to deliver a draft of its final report to IBC on May 11.
KPMG’s research is based on input from numerous Canadian insurers, regulators, the National Association of Insurance Commissioners in the United States, the California Earthquake Authority, Australia and the Reinsurance Association of America (RAA)’s Catastrophe Modeling Conference in February 2010.
KPMG’s research also showed a wide range of practices in the industry concerning data management tools and modeling processes for assessing catastrophe risks in Canada.
This included different approaches for:
•    managing and testing data quality;
•    model selection;
•    validating key model assumptions;
•    using switches and adjustment factors; and
•    synthesizing different results from multiple models.