New S&P Criteria Could Cause Downgrades

Some insurers could face negative rating actions when Standard & Poor's revises its criteria for measuring catastrophe risk for primary insurers, the agency said in a report today.

The revised primary insurer catastrophe criteria are not expected to affect any ratings immediately when they are released early in the second quarter.

"But some companies could face negative rating actions if the new criteria reveal previously uncaptured or poorly managed catastrophe risk," said S&P analyst Thomas Upton.

Agency representatives will be discussing these changes in criteria and capital requirements with insurance companies to give them time to adjust their risk profiles accordingly. Traditionally, a 6-to-12 month phase-in period is allowed.

The S&P approach to measuring catastrophe risk has traditionally been based on premium charges. However, when the new criteria are implemented, primary insurance catastrophe risk will be based on exposure, such as a probable maximum loss figure that is both company-specific and based on net exposures as opposed to gross figures, the report said.

The new criteria capital charge is also expected to be an aggregate probable maximum loss as opposed to an occurrence probable maximum loss.

S&P does expect that the new primary insurance catastrophe criteria will increase required capital for companies, though it will be company-specific based on the underlying portfolio of exposures.

"So not all primary companies will experience the same relative increase in required capital," Mr. Upton said.

S&P's probable maximum loss for reinsurance companies is a global all-perils 1-in-250-year property probable maximum loss--thereby giving credit for uncorrelated exposures.

The agency approach for reinsurers of catastrophe risk is based on a net aggregate property-only 1-in-250-year probable maximum loss, with some offsets based on premiums.

Although the criteria applied for reinsurers of catastrophe risk are not changing, primary insurance catastrophe risk is expected to lean toward a similar approach as already applied to reinsurers, thereby establishing consistency in criteria, the report said.