Insurers have questioned new board-level risk requirements from the Australian Prudential Regulation Authority (APRA) that involve the use of catastrophe modelling.

Uncertainties around modelling mean delivering firm answers at board level is not always possible, Wesfarmers Insurance Group Actuary Daniel Tess told a Risk Management Solutions seminar in Sydney last week.

“The Wesfarmers board knows [the modelling] does not capture 100% [of the risk]… so they know there’s error there, but they’d like to know how much [error] we are talking about. We struggle to give that to them and I struggle to get it for myself.”

Mr Tess says insurance is not a core business for Wesfarmers, and the board has other things like retail issues to concentrate on. “When they look at our models, what they are really trying to get is a feel for what the true underlying risk is.”

Uncertainty also surrounds non-model perils, he says. “APRA’s big horse they are on with this is non-model perils… they ask us, ‘What’s your model for non-model perils?’”

He says better technical and scientific collaboration is needed to overcome the problem of different models producing different answers, sometimes with great discrepancies.

Under standards due to take effect next January 1, insurers have identified improvements to stress-testing regimes for the next 18 months. Boards must also set out clear plans and appoint chief risk officers, APRA says.

Aon Benfield Australia and New Zealand Head of Analytics Ben Miliauskas told the seminar boards now show more interest in realistic disaster scenarios and corporate resilience, but understanding modelling is only the start of the process.

Brokers have taken the lead on catastrophe modelling, but APRA has made it “very explicit in their communications that they want brokers removed from discussions in that regard”.

Ryrie Consulting Principal Scott Ryrie says there can be “massive misunderstanding” at senior and board level about the documentation that needs approval in catastrophe management.

“If they are signing off on a one-in-250 year risk, some people don’t understand what they are signing, which is pretty awkward.”

Swiss Re Head of Property Product Management Asia-Pacific Gabor Jaimes told the seminar more education is needed on the limits of catastrophe modelling.