While innovative catastrophe bonds are being structured aroundrisks other than U.S. hurricanes, Standard & Poor's is notcomfortable rating all possible deals being dreamed up by issuersand securities firms, the rating agency said.

During S&P's “Insurance-Linked Securities Conference” in NewYork earlier this month, David Zuber, an S&P director, saidexamples of bonds the rating agency hesitates to rate include thoselinked to U.S. wildfires, to earthquakes in China and to terrorrisks throughout the world, as well as some bonds structured torespond to insurer-specific exposures.

Reacting to rumors about a Chinese earthquake bond in theoffing, Mr. Zuber said S&P will want to understand more aboutthe third-party agencies that will report the events triggering thebonds.

“I would be hard pressed to think that they would rely on theU.S. Geological Society to generate data for an event in China,” hesaid, indicating his discomfort with the possible use of alesser-known reporting source.

Turning to a U.S. wildfire risk, which was included in onemultiperil catastrophe bond that S&P recently rated, Mr. Zubernoted that the rating agency would never rate a bond that onlycovers wildfires because of the potential for a non-naturalfactor–arson–to trigger the events.

In the bond that S&P rated, the contribution of wildfirerisk to the deal was minimal, he said.

“The probability of attachment for one of the bond tranches(segments or tiers) was on the order of 2 percent,” he said. Inaddition, “even if the modeling had been off by a factor of 1,000percent,” or if the insurer were to suffer wildfire losses 10-timesgreater than it had in the most recent large event–the $85 millionfor the October 2007 California wildfires–the attachment point forthat tranche would not be breached.

The rating he was referring to was for East Lane Re II notesissued by Chubb and rated by S&P in early April. S&Passigned a “double-B” to two of the tranches and a “B-minus” to athird.

Mr. Zuber said S&P has also never gotten comfortable withrating cat bonds linked to terrorism risk, again highlighting “thepotential for human activity” to impact the exposure as thereason.

In spite of efforts of catastrophe modeling firms to convincehim otherwise, “I fail to understand how anyone can model thepossibility of someone walking into Grand Central with a backpackand a bomb,” he said.

At a separate session, Peter Nakada, managing director of RMSConsulting, noted that another rating agency, Moody's, did rate thefirst-ever terrorism cat bond (A3) for World Cup soccer games inGermany in 2006.

Referring to S&P's unwillingness to issue terror bondratings, and more general marketplace skepticism about the abilityof modeling firms to quantify the probability of terror attacks, hetold the audience that an RMS scientist believes RMS is “betterable to estimate the probabilities of terrorist attacks than ahurricane.”

“The behind-the-scenes reason” for that is that for everyterrorist plot “we hear about in the mainstream media, there arenine others that don't actually get reported [in the media] forsecurity reasons.”

Turning to a different issue, both Mr. Nakada and Rodney Clark,managing director for S&P's Financial Institutions group, notedsome changes in bond structures–a trend toward so-called“indemnified deals”–which the S&P representatives said can alsobe problematic from a rating perspective.

Mr. Nakada referred to this as “micro-trend or a blip” in alonger-term trend moving in the reverse direction–away from suchdeals and toward deals based in external triggers, such as industryloss indexes or parametric triggers (like the wind speed in ahurricane or the amount of shake during an earthquake). Heattributed the re-emergence of “indemnified deals” to the demise ofa sidecar market in which insurer-specific risks were ceded tolimited life reinsurers.

James Brender, an S&P director, explained that anindemnified deal is one that is triggered by losses specific to theissuer cedent. “A specific cedent is going to perform differentlythan the industry as a whole because it can have [geographic]concentrations, favorable or unfavorable, and weaker or strongerselection of risk.”

“So a key element of [analyzing] an indemnified cat bond isdetermining to what extent is the cedent likely to be anunfavorable performer after a major event,” he said.

Mr. Clark conceded that S&P has “been slightly an annoyanceto some members of the banking community” in the past year, becauseof its reluctance to rate some “indemnified deals.”

Mr. Zuber explained that the problematic deals were ones thatcame from nonrated entities–those insurance companies for whichS&P has not previously issued a financial strength rating.

While he said that a full public rating of the financialstrength of an insurer is not required for the insurers to get arating on an indemnified cat bond it issues, he added that S&Pwould probably have to know as much about a company's underwritingand risk management as it would know if it did issue such afull-blown rating.

Some nonrated entities “feel as if we would be somehow intrudingif we want to get answers to what to me seem like very basicquestions,” he said. “We're not going to risk our franchise ontaking someone's statements at face value” assuring S&P thatthey know what their doing.

He continued, “There have been a couple of occasions where[insurers] felt as if some of [these] hurdles we've put in front ofthem were a little too onerous–and I understand that they may havegone to other rating agencies.”