Insurance industry “proactive” in mild 2006 storm season

The benign 2006 storm season bodes well for investors in catastrophe-focused carriers and in alternative risk-transfer vehicles, according to a recent Moody’s Investors Service report.
Entitled “Current Trends in Insurance Catastrophe Risk Management,” the report says the reduced storm activity could also signal softening market conditions for peak catastrophe zones at some time in 2007.
Nevertheless, Moody’s says, the majority of property and casualty insurer ratings will remain stable.
“After the difficult 2004-05 seasons, insurers and reinsurers chose to be very proactive during 2006,” Moody’s vice president Pano Karambelas, the author of the report, said in a press release. “They focused additional attention on catastrophe risk management, thereby enhancing the involvement of company directors and risk committees, as well as pursuing initiatives such as shedding exposures, increasing prices, and purchasing additional reinsurance (or alternative risk transfer) protection.”
Karambelas said a number of forces acting in concert after the back-to-back storm seasons have created a demand-supply imbalance. “This imbalance remains in place in spite of significant amounts of new capacity that has entered the industry looking for outsized returns,” he said.
“Clearly, the industry is experiencing a heightened perception of catastrophe risk and/or capacity restrictions, as managements employ the updated catastrophe models offered by the major catastrophe-modeling vendors in making their pricing decisions,” Karambelas observed.
Moody’s recent catastrophe survey arrived at the following key conclusions:
property and casualty companies are paying greater attention to managing difficult-to-model risk factors. For example, they are monitoring zonal aggregations, exiting certain lines of business or adhering to more conservative contract terms and conditions.
Companies are watching more often for demand surge, storm surge, and fire following.
Issuers reported a near universal use of models to manage portfolio accumulations. Having said that, Moody’s also found that “tie-ins of accumulations management to ‘front-end’ applications, such as pricing of business, were less common.” Such tie-ins “varied considerably in sophistication,” Moody’s noted.
Issuers are more aware of the importance of capturing accurate exposure data, particularly commercial lines, beyond precise location-coding capabilities.