Reinsurers may be downgraded after Katrina: Moody’s

Moody’s Investors Service says reinsurers with “outsized exposure” to Hurricane Katrina damage in New Orleans, or to the city’s hard-hit industries such as energy or gaming, “could face rating downgrades, particularly if they do not recapitalize quickly.”
The recently released Moody’s report notes devastation wrought by Hurricane Katrina will almost certainly cause an unprecedented level of losses for the insurance industry.
The report’s co-author, Bruce Ballentine, a Moody’s insurance analyst, says reinsurers are likely to absorb a larger share of total insured losses from Hurricane Katrina than from other hurricanes. “We expect that most large reinsurers have managed their Gulf Coast exposures prudently, enabling them to absorb losses from Katrina and sustain their ratings,” he says.
He goes on to note that “a majority of losses in New Orleans may be in commercial lines, which are generally more heavily reinsured than personal lines. This points toward a relatively large share of Katrina’s losses being borne by reinsurers.” The report says that catastrophe reinsurance and retrocessional covers are likely to be triggered as well.
“The challenge of estimating losses is compounded for reinsurers, because they are generally a step removed from the underlying risks,” says Ballentine.
Reinsurers provide bulk coverage to primary insurers on a range of underlying policies and exposures. Following a catastrophe, primary insurers adjust and settle claims on the underlying policies, and then submit aggregate claims to their reinsurers. As a result, reinsurers have limited information on the underlying losses and they receive that information on a lagged basis.
Moody’s recognizes that catastrophes are integral to the insurance business and often self- correcting. Major events often lead to higher prices and/or tighter terms in the affected locations and business lines, helping insurers and reinsurers to recoup their losses. Moreover, the rating agency believes that a well-positioned reinsurer should be able to raise fresh capital, if necessary, to shore up its balance sheet and fund new business.
“Nevertheless, firms that post substantial losses and fail to recapitalize may be vulnerable to downgrades,” concludes Ballentine.