S&P: Challenges to Property Catastrophe Reinsurers

September 16, 2004

Standard & Poor’s Ratings Services has published a review of the property catastrophe reinsurance industry, titled “Is Property Catastrophe Reinsurance a Commodity,” examining its commodity-like characteristics and the new trends in modeling within the sector that support these characteristics.

“In the past few years, property catastrophe reinsurance has exhibited commodity-like characteristics such as similar price, low barriers to entry, and liquid market,” explained S&P’s credit analyst Damien Magarelli. “This is in part due to trends in modeling and the number of new start-ups created after the WTC collapse. In contrast, there are some unique characteristics–differentiated models, underwriting, data management, and management expertise–exhibited by some companies that lead to a competitive advantage.”

Many reinsurers that write property catastrophe reinsurance utilize
vendor models to manage probable-maximum-loss limits, price exposures, and aggregate risk. As a result, many reinsurers will assess property catastrophe reinsurance risk by applying the same approach, and this often produces a similar result. Furthermore, the vendor models are frequently being updated, which progressively provides the means for companies to understand the more difficult territories and perils to write property catastrophe reinsurance. These models reduce the information gap that a company might have previously exploited through exclusive modeling capabilities.

S&P believes that some companies are not as reliant on the
vendor models, because they have their own models and are able to select the higher return business, while others continue to write inefficiently priced risks. Those companies with their own exclusive models may calculate very different prices for the same exposures, and thereby avoid commodity pricing and perform better over the long-term.

“In addition, property catastrophe reinsurance is not a line of business
that has significant barriers to entry—in fact, as has been exhibited
since WTC, this line seems to be entered into relatively easily,” added Magarelli. “The significant number of new players in 2002 (and the capacity they provided) contributed to property catastrophe reinsurance exhibiting commodity like features. The various new entrants increased the liquidity within the property catastrophe reinsurance market, making it easier for brokers and clients to place exposures on programs through their willingness to provide capacity.”

The report can be found on Standard & Poor’s Web site at www.standardandpoors.com.

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