Improving the understanding and consideration of uncertainty in the (re)insurance industry
Lead Research Organisation:
University of Bristol
Department Name: Civil Engineering
Abstract
Summary
Insurance companies provide insurance against a wide range of threats, such as natural catastrophes, nuclear incidents and terrorism. To monitor risk and support investment decisions, mathematical models are used to set the premiums which they charge to their clients such that there is little risk of their company finding itself in financial trouble, should large rare events occur. While these models are essential tools for improving the transparency of an insurer's risk profile, their development is costly and their value for decision-making is undermined by a lack of rigorous and trusted processes for model validation. The insurance sector faces increasing regulation which requires them to test their capital models in such a way that uncertainties are adequately captured and that plans are in place to assess the risks and their mitigation. The building and testing of financial models constitutes a high cost for insurance companies, and is a time intensive activity, which conflicts with the high day-to-day workload.
This project aims to transfer methods and tools (i.e. global sensitivity analysis and the SAFE software toolbox) developed in academia and funded by NERC projects to the insurance industry and to tailor them in such a way to facilitate their uptake in the insurance industry. This will equip them with tools to better capture the risks and the uncertainties embedded in their models, with more structured approaches to validate their models. Therefore, this will increase the robustness of their financial decisions.
In the first stage of my fellowship project, I will build on the existing collaboration with the (re)insurance company XL Catlin to review how numerical models, both catastrophe and capital models, are developed, validated and used within their company. I will also develop pilot applications, a tailored version of these tools and detailed guidelines on how to use them, which will form the basis for disseminating best practices across the wider (re)insurance industry. This will be achieved both by collaborating with the OASIS consortium - including a tailored version of SAFE in their open access platform as the standard methodology for rigorous model validation - and by holding workshops for the wider (re)insurance industry.
An increased understanding and consideration of uncertainty in the insurance modelling process can only promote a more continuous and aware use of model predictions to support financial decision-making. This will be driven by the adequate quantification of risks and vulnerability due to possible models flaws, therefore leading to better-informed and more robust business decisions. This in turn will strengthen the leading position of the UK in the area. Ultimately this will increase the transparency of an insurer's risk profile, contribute to the reduction and management of financial risk, reduce capital requirements and stabilise earning.
Insurance companies provide insurance against a wide range of threats, such as natural catastrophes, nuclear incidents and terrorism. To monitor risk and support investment decisions, mathematical models are used to set the premiums which they charge to their clients such that there is little risk of their company finding itself in financial trouble, should large rare events occur. While these models are essential tools for improving the transparency of an insurer's risk profile, their development is costly and their value for decision-making is undermined by a lack of rigorous and trusted processes for model validation. The insurance sector faces increasing regulation which requires them to test their capital models in such a way that uncertainties are adequately captured and that plans are in place to assess the risks and their mitigation. The building and testing of financial models constitutes a high cost for insurance companies, and is a time intensive activity, which conflicts with the high day-to-day workload.
This project aims to transfer methods and tools (i.e. global sensitivity analysis and the SAFE software toolbox) developed in academia and funded by NERC projects to the insurance industry and to tailor them in such a way to facilitate their uptake in the insurance industry. This will equip them with tools to better capture the risks and the uncertainties embedded in their models, with more structured approaches to validate their models. Therefore, this will increase the robustness of their financial decisions.
In the first stage of my fellowship project, I will build on the existing collaboration with the (re)insurance company XL Catlin to review how numerical models, both catastrophe and capital models, are developed, validated and used within their company. I will also develop pilot applications, a tailored version of these tools and detailed guidelines on how to use them, which will form the basis for disseminating best practices across the wider (re)insurance industry. This will be achieved both by collaborating with the OASIS consortium - including a tailored version of SAFE in their open access platform as the standard methodology for rigorous model validation - and by holding workshops for the wider (re)insurance industry.
An increased understanding and consideration of uncertainty in the insurance modelling process can only promote a more continuous and aware use of model predictions to support financial decision-making. This will be driven by the adequate quantification of risks and vulnerability due to possible models flaws, therefore leading to better-informed and more robust business decisions. This in turn will strengthen the leading position of the UK in the area. Ultimately this will increase the transparency of an insurer's risk profile, contribute to the reduction and management of financial risk, reduce capital requirements and stabilise earning.
People |
ORCID iD |
Valentina Noacco (Principal Investigator / Fellow) |
Publications
Noacco V
(2019)
Matlab/R workflows to assess critical choices in Global Sensitivity Analysis using the SAFE toolbox.
in MethodsX
Pigott C
(2022)
Pioneering catastrophe model evaluation with the SAFE toolbox
Title | Introductory animated video to Sensitivity Analysis |
Description | I created an animated video/info graphic to introduce the topic of Sensitivity Analysis to a non-technical audience. |
Type Of Art | Film/Video/Animation |
Year Produced | 2020 |
Impact | It has been included in the Multi-hazard risk principles in an uncertain world - Masterclass website: http://www.uncertainworld.net/library.html so any impact will be on viewers reached by that website. |
URL | https://safe-insurance.uk/GSA-SAFE_material.html |
Description | The key finding is that GSA methodology and related tools can be effectively transferred to the re-insurance sector, which is able to adopt them in their current practice and internally train other teams to use them. |
Exploitation Route | We wrote a whitepaper with AXA XL which showcases the main outcomes of the collaboration which sets best practice on model evaluation for other re/insurance companies: https://axaxl.com/-/media/axaxl/files/pdfs/campaign/reinsurance-outlook/downloads/safe-axa-xl-whitepaper_v-july-12-2022-clean-copy-pmw.pdf |
Sectors | Financial Services, and Management Consultancy |
URL | https://safe-insurance.uk/Outputs.html |
Description | The project enabled (re)insurance companies to more efficiently capture the uncertainties and sensitivities embedded in their mathematical models, with structured approaches to validate their models and to test the impact of assumptions on the model predictions. By better capturing these uncertainties, they will be able to make informed decisions depending on the stakes of the risk underwritten and the risk attitude of the decision-maker. |
First Year Of Impact | 2017 |
Sector | Financial Services, and Management Consultancy |
Impact Types | Economic |
Description | AXA XL model evaluation team adopted Global Sensitivity Analysis methodology and related tools which I transferred as their current practice |
Geographic Reach | Multiple continents/international |
Policy Influence Type | Influenced training of practitioners or researchers |
Impact | They are now able to evaluate catastrophe models much more efficiently and meet regulatory requirements. |
Description | Communicating key engineering risk principles (Strategic Engagement Award - EPSRC Impact Acceleration Account) |
Amount | £49,869 (GBP) |
Organisation | Engineering and Physical Sciences Research Council (EPSRC) |
Sector | Public |
Country | United Kingdom |
Start | 04/2020 |
End | 03/2021 |
Description | Collaboration with AXA XL |
Organisation | AXA XL |
Country | United Kingdom |
Sector | Private |
PI Contribution | I've contributed by transferring state-of-the-art Global Sensitivity Analysis (GSA) methods, tools (SAFE toolbox) and expertise. I've transferred this expertise through regular meetings with the actuaries at AXA XL and through two training workshops (each attended by around 10-15 participants), for which I developed training material as tutorials in Rmarkdown. I'm further collaborating with the model validation team at AXA XL and improving the uncertainty quantification of their CAT flood models. |
Collaborator Contribution | The collaborators have contributed through sharing models, data and input in interpreting the results. |
Impact | This collaboration have resulted in case studies which have been presented at several conferences and have formed the basis of training material. |
Start Year | 2017 |
Description | Collaboration with JBA Risk Management |
Organisation | JBA Trust |
Department | JBA Risk Management |
Country | United Kingdom |
Sector | Private |
PI Contribution | I've contributed by transferring state-of-the-art Global Sensitivity Analysis (GSA) methods, tools (SAFE toolbox) and expertise to the modelling team at JBA Risk Management. I've transferred this expertise through regular meetings and and through a presentation (attended by around 7 participants). Together we have delivered the workshop "How SAFE is your model? Sensitivity Analysis in flood catastrophe modelling" at the Oasis Conference 2019 - The good, the bad and the ugly. The output of the collaboration are available here: https://safe-insurance.uk |
Collaborator Contribution | The collaborators have contributed by providing training about their models, by sharing models and data, by running the model and by providing input in interpreting the results. |
Impact | This collaboration have resulted in case studies which have been presented at conferences and have formed the basis of training material used during presentations and tutorials at other re/insurance companies. |
Start Year | 2018 |
Description | Collaboration with OASIS LMF |
Organisation | Oasis Loss Modelling Framework |
Country | United Kingdom |
Sector | Charity/Non Profit |
PI Contribution | I've contributed by developing a case study which links an OASIS model to the SAFE toolbox, and which shows the type of results that you can get from Global Sensitivity Analysis (GSA) and the benefits of using GSA and the SAFE toolbox. |
Collaborator Contribution | The collaborators have contributed through helping me to set up the OASIS software on my laptop and my helping to deliver the workshops during the OASIS conference in 2019. |
Impact | The case study developed during the collaboration is used as training material and is available here: https://safe-insurance.uk/Outputs.html |
Start Year | 2018 |
Description | Blog on Cabot Institute website |
Form Of Engagement Activity | Engagement focused website, blog or social media channel |
Part Of Official Scheme? | No |
Geographic Reach | International |
Primary Audience | Media (as a channel to the public) |
Results and Impact | I wrote a blog for the Cabot Institute website on an insurance related event I've attended. |
Year(s) Of Engagement Activity | 2019 |
URL | http://cabot-institute.blogspot.com/2019/01/what-global-threats-should-we-be-most.html |
Description | Co-delivered 2 workshops at OASIS LMF conference 2019 |
Form Of Engagement Activity | Participation in an activity, workshop or similar |
Part Of Official Scheme? | No |
Geographic Reach | International |
Primary Audience | Industry/Business |
Results and Impact | Co-delivered together with JBA Risk Management and OASIS LMF two workshops on "How SAFE is your model? Sensitivity Analysis in flood catastrophe modelling". The first day the workshop was attended by ~40-50 people, while the second day by ~20-30 people. People showed interest in using the SAFE toolbox after the conference. |
Year(s) Of Engagement Activity | 2019 |
URL | https://oasislmf.org/application/files/6415/8074/3163/Agenda2019_OasisConference.pdf |
Description | Co-delivered workshop for my research group |
Form Of Engagement Activity | Participation in an activity, workshop or similar |
Part Of Official Scheme? | No |
Geographic Reach | Local |
Primary Audience | Postgraduate students |
Results and Impact | I co-delivered a workshop for 10 PhD students, postdoc and visiting professor in my research group on an introduction to GSA/SAFE and RMarkdown workflow to guide through the steps of applying GSA to a rainfall-runoff model using SAFE in R. This has led to new users of the SAFE toolbox. |
Year(s) Of Engagement Activity | 2018 |
Description | Delivered 4 tutorials at AXA XL across various business units |
Form Of Engagement Activity | Participation in an activity, workshop or similar |
Part Of Official Scheme? | No |
Geographic Reach | Regional |
Primary Audience | Industry/Business |
Results and Impact | I delivered 4 tutorials at AXA XL (two to pricing actuaries, each with around 10-15 participants, and two to decision-makers (senior underwriters, head of pricing and Natural Hazards & Climate Change Manager) both in person and via teleconference). In the first two I delivered an introduction to GSA/SAFE + RMarkdown workflow to guide through the steps of applying GSA to a pricing model using SAFE in R, while in the last two I delivered an introduction to GSA/SAFE, benefits of using GSA through examples from previous collaborations with other teams at AXA XL. This has lead to new collaborations inside the company. |
Year(s) Of Engagement Activity | 2018,2019,2020,2021 |
Description | Delivered tutorial in Southampton for international researchers |
Form Of Engagement Activity | Participation in an activity, workshop or similar |
Part Of Official Scheme? | No |
Geographic Reach | International |
Primary Audience | Professional Practitioners |
Results and Impact | I delivered a tutorial for 15 researchers coming from various international institutions on an introduction to GSA/SAFE and RMarkdown workflow to guide through the steps of applying GSA to a rainfall-runoff model using SAFE in R. |
Year(s) Of Engagement Activity | 2019 |
Description | Organised an insurance related workshop at Bristol University titled: Making insurance work for all - Disaster resilience in the developing world |
Form Of Engagement Activity | Participation in an activity, workshop or similar |
Part Of Official Scheme? | No |
Geographic Reach | National |
Primary Audience | Industry/Business |
Results and Impact | Networking event with researchers from Bristol University and (re)insurance industry practitioners to identify current opportunities and to discuss possible collaborations to improve the resilience to natural hazards in developing countries. It aimed to bring together researchers at the University of Bristol (engineering) and practitioners from the (re)insurance sector to share experience and explore potential opportunities for collaboration in the field of strengthening resilience to natural hazards in developing countries. The day was divided into two parts: discussion groups between UoB researchers and leading re/insurance practitioners (attended by 21 people) and presentations open to the general public (attended by ~40 people). Impacts have been the creation of at least three connections between academia and industry, which resulted in potential collaborations and in a tutorial I delivered at an insurance company (Willis Re). |
Year(s) Of Engagement Activity | 2019 |
URL | http://www.bris.ac.uk/engineering/events/2019/resilience.html |
Description | Poster at EGU 2018 |
Form Of Engagement Activity | A talk or presentation |
Part Of Official Scheme? | No |
Geographic Reach | International |
Primary Audience | Other audiences |
Results and Impact | I presented a poster about my work, and I have interacted and exchanged ideas with a variety of scientists and industry practitioners. The discussion with other researchers was engaging and useful, as it provided feedback and gave me ideas on how to develop my work further. |
Year(s) Of Engagement Activity | 2018 |
Description | Poster at Models to Decisions (Decision Making Under Uncertainty) |
Form Of Engagement Activity | A talk or presentation |
Part Of Official Scheme? | No |
Geographic Reach | National |
Primary Audience | Other audiences |
Results and Impact | I presented a poster about my work, and I have interacted and exchanged ideas with a variety of scientists and industry practitioners. The discussion with other researchers was engaging and useful, as it provided feedback and gave me ideas on how to develop my work further. It also increased the exposure of my work outside academia. |
Year(s) Of Engagement Activity | 2018 |
Description | Poster at UKADR |
Form Of Engagement Activity | A talk or presentation |
Part Of Official Scheme? | No |
Geographic Reach | National |
Primary Audience | Industry/Business |
Results and Impact | I presented a poster about my work, and I have interacted and exchanged ideas with researchers and third sector members. |
Year(s) Of Engagement Activity | 2018 |
Description | Presentation at the Bristol Actuarial Society |
Form Of Engagement Activity | A talk or presentation |
Part Of Official Scheme? | No |
Geographic Reach | Local |
Primary Audience | Industry/Business |
Results and Impact | I gave a presentation on GSA and the SAFE toolbox, and examples of the benefits of using GSA through a pricing model case study. This has sparked an engaged discussion after the talk. |
Year(s) Of Engagement Activity | 2019 |
Description | Presentation, tutorial and discussions at AXA (Paris) |
Form Of Engagement Activity | Participation in an activity, workshop or similar |
Part Of Official Scheme? | No |
Geographic Reach | International |
Primary Audience | Industry/Business |
Results and Impact | I gave a presentation, a tutorial and had dedicated discussions with the natural hazard modelling team at AXA Paris over two days. They have plans to further use the toolbox and potentially to integrate it with their modelling framework. |
Year(s) Of Engagement Activity | 2020 |
Description | Tutorial at AON |
Form Of Engagement Activity | A talk or presentation |
Part Of Official Scheme? | No |
Geographic Reach | Regional |
Primary Audience | Industry/Business |
Results and Impact | I gave a presentation on GSA and the SAFE toolbox, examples of the benefits of using GSA, and a tutorial on how to use the SAFE toolbox, using as an example JBA's Global Flood Model. I've also helped them to set-up pilot application of GSA/SAFE to their model. They fed back that they are setting up an analysis of their model using the SAFE toolbox. |
Year(s) Of Engagement Activity | 2019 |
Description | Tutorial at Willis Re |
Form Of Engagement Activity | A talk or presentation |
Part Of Official Scheme? | No |
Geographic Reach | Regional |
Primary Audience | Industry/Business |
Results and Impact | I gave a presentation on GSA and the SAFE toolbox, examples of the benefits of using GSA, and a tutorial on how to use the SAFE toolbox, using as an example JBA's Global Flood Model. They requested a license of the toolbox after the workshop. |
Year(s) Of Engagement Activity | 2019 |
Description | Workshop at Munich Re |
Form Of Engagement Activity | A talk or presentation |
Part Of Official Scheme? | No |
Geographic Reach | International |
Primary Audience | Industry/Business |
Results and Impact | I gave an online presentation on GSA and the SAFE toolbox, examples of the benefits of using GSA, and a tutorial on how to use the SAFE toolbox, using as an example the case study I did with JBA on their Global Flood Model and the work I did with AXA XL. They requested a license of the toolbox after the workshop. |
Year(s) Of Engagement Activity | 2020 |