Data quality and risk selection are among the factors A.M. Bestwill examine when determining what impact securitizationtransactions will have on the financial strength ratings ofparticipating insurance companies.

The Oldwick, N.J.-based agency issued a set of guidelines todayas to what analysts will look for when trying to gauge the impact asecuritization or monetization transaction will have on thesponsoring insurance company.

“Within these analyses, A.M. Best takes into consideration thestructural integrity of the transactions and the analytical rigorapplied by various experts and advisors, such as actuaries,modelers and investment banks,” said the agency in a report issuedtoday.

The report noted that in some insurance securitizations not allrisk is transferred from the ceding company. “In thesetransactions, it is critical to understand specifically what risksare being transferred and what types of agreements are in place toshield investors from risks associated with pandemics, catastrophesand terrorism,” the report stated.

Best said the following factors will be examined byanalysts:

o How accurate is the data gathered and the likelihood ofregulatory intervention for transactions that rely on credit risksof insurance-reinsurance companies?

o How have the various scenarios applied by the actuarial andcatastrophe modeling agencies been determined and what are theresults of the scenarios?

o Are policyholders subject to the risk of anti-selection if thebetter risks are transferred to investors?

o What risks can be put back to the originating insurancecompanies under scenarios of extreme adverse developments inmortality, lapse rates, interest rates, expense ratios, loss ratiosand interest rates.

o For transactions based on parametric triggers such ascatastrophe bonds, how is the probability of an event occurringtied to the probability of a trigger being activated?