Exposures emphasized in new CAT risk ratings

Standard & Poor’s Ratings Services says it will be revising its criteria for measuring catastrophe risk for primary insurers early in the second quarter of this year.
S&P’s says however, that it has no current plans to further revise criteria for reinsurers, which were last updated in July 2005.
The revised primary insurer catastrophe criteria are not expected to affect any ratings immediately. S&P’s notes however, that some companies may face negative rating actions if the new criteria reveals any previously uncaptured or poorly managed catastrophe risks.
The changes in criteria and capital requirements, S&P’s says, will be discussed with insurance companies in order to give them time to adjust their risk profiles in accordance with the new criteria. Traditionally, a six to 12 month phase-in period is allowed.
S&P’s approach to measuring catastrophe risk has traditionally been based on premium charges. However, as soon as the new criteria are implemented the primary insurance catastrophe risk will be based on exposure, such as a probable maximum loss figure that is both company-specific and based on net exposures as opposed to gross figures.
The new criteria capital charge is also expected to be an aggregate probable maximum loss as opposed to an occurrence probable maximum loss. Specific details of the new criteria for primary insurers will be published by June 2006.