Evaluation of terrorism exposures updated

Standard & Poor’s Ratings Services is enhancing its process for evaluating the terrorism exposure of interactively rated insurers and reinsurers.
The updated process, S &P’s says, is partly a response to the increased insurance retentions under the two-year extension of the Terrorism Risk Insurance Act of 2002. The ratings agency says the enhancement will also allow them to further quantify the exposure and risk-management capabilities of the insurance industry.
The process change will affect insurance and reinsurance companies globally and will be consistent across all sectors, as S & P’s says it will be using the same approach and questionnaire for all property & casualty companies.
A new questionnaire, which is specific to terrorism risk, will be distributed in the second quarter of 2006 to S & P’s interactively rated insurance companies in a move to help the ratings agency better evaluate each company’s terrorism exposure and risk-management capabilities.
The questionnaire, S & P’s says, will solicit the data necessary for them to make an evaluation of gross and net terrorism exposure (by line of business), with specific questions regarding various types of events and within various ring distances (such as between an insured location and a potential target).
In the case of stand-alone terrorism policies, S & P’s also requests full limit detail as well as details on single-address exposure. The questionnaire, which has a significant number of qualitative questions focused on evaluating each company’s risk profile and underwriting focus, also requests premium data.
S & P’s says it developed a flexible questionnaire that allows companies to provide data that matches their particular risk profile and exposure set.
Currently, S & P’s charges terrorism risk within the premium and reserve factors applied within the risk-based capital model, so terrorism risk is not separated out individually with stand-alone terrorism premium or reserve charges. Currently, the new questionnaire is only an update to S & P’s data-collection process, but the Company says there have yet to be any changes to its capital model risk charges used to measure the capital adequacy ratio.
S & P’s says it expects minimal rating changes to occur as a result of this process change and data-collection enhancement. However, this new terrorism questionnaire is intended to highlight the companies that have better risk-management systems, capabilities, and controls for measuring terrorism risk, which will be factored into the rating qualitatively.