S&P Alters Approach to Gauging Insurers’ Terrorism Exposure

June 8, 2006

Standard & Poor’s Ratings Services said it is changing its process for evaluating the terrorism exposure of insurers and reinsurers.

The updated process is partly a response to the increased insurance retentions under the two-year extension of the Terrorism Risk Insurance Act of 2002, and it is also to quantify further the exposure and risk-management capabilities of the insurance industry. The process change will affect insurance and reinsurance companies globally and is consistent across sectors, as Standard & Poor’s said it will be using the same approach and questionnaire for all property/casualty companies.

Standard & Poor’s said it expects minimal rating changes to occur as a result of this process change and data-collection enhancement. However, the new terrorism evaluation will highlight the companies that have better risk-management systems, capabilities, and controls for measuring terrorism risk, and this will be factored into the rating qualitatively, according to the organization.

Standard & Poor’s also said it has been qualitatively evaluating terrorism risk for companies, so this risk has largely been factored into ratings already.

To help it better evaluate each company’s terrorism exposure and risk-management capabilities, the firm has developed a new questionnaire that is specific to terrorism risk. The questionnaire will be distributed in the second quarter of 2006 to Standard & Poor’s interactively rated insurance companies.

The questionnaire is designed to solicit the data necessary for 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, full limit detail is also requested as well as details on single-address exposure.

The questionnaire also requests premium data.

Lastly, the questionnaire has a number of qualitative questions focused on evaluating each company’s risk profile and underwriting focus. However, Standard & Poor’s says the questionnaire is flexible in that it allows companies to provide data that matches their particular risk profile and exposure set, and Standard & Poor’s says it will work with each company’s level of data to ease the completion of the questionnaire.

Currently, Standard & Poor’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. At this point, this new questionnaire is only an update to the firm’s data-collection process, but there are no changes to its capital model risk charges used to measure the capital adequacy ratio.

As part of the ongoing rating review process and surveillance, Standard & Poor’s expects each company to provide it with this additional data and have detailed discussions regarding this process change.

Source: www.standardandpoors.com.

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