NU Online News Service, Dec. 29, 1:47 p.m. EST

The planned revision of a catastrophe model set for early spring 2011 could impact reinsurance pricing on Jan. 1, and property insurance prices in coastal and inland areas, a rating agency analyst said recently.

During the recent Standard & Poor's Insurance Hot Topics Conference, Taoufik Gharib, director and reinsurance specialist for S&P's Rating Services in New York, said "it remains too early to tell" the actual impact of a model change in the works at Newark, Calif.-based Risk Management Solutions. He suggested, however, that higher property insurance prices for U.S. inland areas are possible, as well as lower prices along the Atlantic coast.

Mr. Gharib, who detailed S&P's stable outlooks for the Bermuda and global reinsurance sectors during a session on key issues impacting the property and casualty insurance industry, was responding to a question from panel moderator, Damien Magarelli, director and analytical manager for S&P, about the impact of the model change on S&P's ratings.

First providing some background about the planned change to RMS' U.S. wind model, Mr. Gharib said: "They're looking at the interaction of the wind and the surface of the sea. Specifically, during a hurricane, because of the roughness [of the sea surface], it reduces the wind speed, and potentially the impact on coastal areas is less than previously expected."

RMS, contacted by NU for its description of the change, noted that Mr. Gharib's assessment of the wind-sea interaction component was correct, but that the new model "will also reevaluate regional vulnerability and construction standards based on major lessons learned from Hurricane Ike" in 2008. The modeler also described the planned changes in an Aug. 27, 2010 press announcement

Mr. Gharib noted that the interaction of wind and sea surface also impacts inland exposures. "Losses there might be higher than previously expected."

"So potentially you could see [for] coastal areas in Florida, from a PMF [probable maximum flood] perspective, they may be reduced" from prior model results," he said. "This is interesting because insurance companies actually have been reducing their [coastal] exposures and moving inland."

"It remains to be seen what will happen with Gulf of Mexico" modeled results or with Texas exposures, in particular, under the new model, he said, referring to problems that prior catastrophe models had in capturing inland losses produced by Hurricane Ike.

"PMLs are expected to increase. But at this point, it's too early to tell," he said.

From the rating agency's perspective, Mr. Gharib said that "if in 2011, a company would have larger PMLs [based on model results], S&P would have discussions with the companies in terms of how they might be managing their PMLs. "Are they planning to reduce them? If so, are they reducing them by buying more reinsurance?"

Actions to reduce PMLs would also have implications in terms of capital needed to absorb potential catastrophe losses, he noted.

Right now, "it remains too early to tell. It might also impact pricing on Jan. 1, 2011," he said during the December 2010 conference.

(Additional reporting by Chad Hemenway.)

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