An article in an article in the latest issue of EXPOSURE, published by GE Insurance Solutions GE Insurance Solutions, highlights the changes that have been made in catastrophe models since Katrina and concludes they will impact both capital requirements and ratings.
Insurers and reinsurers are facing major changes this year to catastrophe models and a recalibration of rating agency capital requirements, which “will have dramatic implications on insurers and reinsurers that write business in catastrophe-prone areas,” according to the article.
Standard & Poor’s has already put a number of Cat bonds on its CreditWatch list with negative implications due to the changes (See IJ Website June 5).
“The likely effect of these changes is that insurers and reinsurers will need more capital or will have to reduce their peak-zone exposures,” according to the article authored by Jonathan Isherwood, Global Product Strategy Leader, GE Insurance Solutions.
Isherwood predicted that return on capital would fall. Further, he added, reinsurers and insurers may have to increase pricing levels “for key-zone catastrophe risks in order to obtain similar return on equity that they were able to earn before the changes.”
He also speculated that companies might seek to improve capital efficiency “by balancing and/or diversifying their portfolios away from peak-zone capital intense areas, which could cause over-capacity — and competition — in these desired zones.”
Monoline catastrophe writers or companies that have a heavy concentration of catastrophe business “will be disadvantaged in this new environment,” he affirmed.
To read the entire article and other EXPOSURE articles, go to: http://www.geinsurancesolutions.com/erccorporate/inst/pb/ex/index.htm. (See “Model Changes Will Have Major Industry Implications”.)
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