Insurers will require a 10 percent boost in overall capital requirements on average to meet the challenges of increased catastrophe probability, according to a new report from Fitch Ratings.
In addition, carriers will see a 40-to-65 percent increase in capital required to support catastrophe risk, Fitch predicted.
In a conference call this morning, analyst Peter Patrino noted that in the past few months, Fitch has moved to gauging catastrophe risk on an annual aggregate basis as opposed to a single-event occurrence.
In addition, the raters use a Tail Value at Risk (T-VaR) measurement to replace the Probable Maximum Loss figure. T-VaR represents the average of all potential losses from a specific threshold through the very worst event. “Thus, our analysts are able to review and incorporate extreme events into their analysis,” according to Mr. Patrino.
The report also expressed some skepticism about catastrophe model output Fitch has received in the past. “It is Fitch’s belief that PML information provided to us has presented the industry’s overall catastrophe risk exposure to be less than what has transpired in recent accident years,” the report stated.
London-based analyst Chris Waterman said that Fitch will question modeled losses that are generated by updated third-party catastrophe models that do not meaningfully increase in 2006.
“Insurers who show only modest increases in catastrophe risk exposures and are not able to explain what prevented expected losses from growing may become candidates to have their catastrophe risk exposure increased by Fitch in our ratings analysis,” he said.
Catastrophe risk and related capital needs cannot be reviewed independent of all other capital requirements, “thus, Fitch plans to utilize our updated approach to viewing capital requirements within our new capital model, which will be unveiled in 2006,” the report said.
Mr. Waterman noted that a majority of insurers are taking action to increase current capital levels. “Thus, our expectation is that ratings will not be impacted in the near term due to this change in methodology,” he said.