Canadian Underwriter

Fitch reviews adequacy of computer-modeling

September 19, 2005   by Canadian Underwriter

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Fitch Ratings in Chicago says it is reviewing “the reliability of catastrophe modeling” to support its analysis of the capital adequacy of insurers.
Fitch said it presumes probabilistic vendor models used throughout the insurance industry to assess catastrophe exposures represent current, “state-of-the-art” technology.
But “we are increasingly concerned that there are many sources of loss in the event of a major catastrophe that fall outside of the scope of, or are not fully captured by, the modeling analysis,” the company said in a statement. “These sources can include flood, long-term business interruption, looting and fires, as well as ancillary losses on general liability, directors & officers (D&O) or errors & omissions (E&O) policies.”
As a result, Fitch concludes, “the catastrophe models may not be providing a complete, prospective view of the true underlying risk of loss facing insurers for large or unusual events.”
Fitch said it is also keeping an eye on political developments in the wake of Hurricane Katrina. For example, it has an eye on the ultimate resolution of flood-related losses after a well-publicized suit by the Mississippi Attorney General to effectively void flood exclusions in homeowners and other property insurance policies.
“While Fitch is not speculating as to the outcome of the suit, Fitch believes a loss by the industry or a significant compromise on the part of the industry that results in the payment of significant flood-related losses would heighten our view of the industry’s ‘deep pocket’ exposures,” the company said in a statement. “To the extent Fitch could no longer rely on basic policy exclusions, or other loss mitigation efforts in its risk assessments of an insurer’s financial profile, that too would put downward pressure on insurer ratings.”

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