The benign 2006 storm season could signal softening insurance market rates for peak catastrophe zones this year, a rating firm report concludes.
The analysis released today by Moody's Investors Service also said that for investors in catastrophe-focused carriers and alternative risk-transfer vehicles, there is promise of good returns after low storm losses.
Moody's said it expects the majority of property-casualty insurer ratings will remain stable.
Moody's Vice President Pano Karambelas, an author of the report "Current Trends in Insurance Catastrophe Risk Management," said an important finding was that issuers are more aware of the importance of capturing accurate exposure data, particularly commercial lines, beyond precise location coding capabilities.
Mr. Karambelas told National Underwriter that much discussion has revolved around "problems of the frequency and severity assumptions of the modeling vendors, and what we saw is that there is probably a great deal of improvement in the hands of the insurers themselves."
The survey found that companies are almost universally applying models to manage accumulations of exposure in their portfolios and to structure reinsurance programs.
Mr. Karambelas commented that while there is "much discussion about whether catastrophe model updates or revisions are accurate, the largest opportunity to improve the broader approach to risk management is the ability of companies to capture information and assure that the data is correct."
He explained that there is room for improvement in data accuracy. Companies have made great strides in "geo-coding"–the ability to know the precise location of a risk–"but there is a lot more at that location," he said, such as building and construction information, or the coverage itself.
To some extent, he said, insurers tend to model on recent events, whereas they could be doing more to project exposure growth.
Mr. Karambelas said in a statement that insurers and reinsurers "focused additional attention on catastrophe risk management, thereby enhancing the involvement of company directors and risk committees as well as pursuing initiatives such as shedding exposures, increasing prices, and purchasing additional reinsurance (or alternative risk transfer) protection."
He continued that a number of forces "acting in concert after the back-to-back storm seasons have created a demand-supply imbalance." This imbalance, he said, remains in place in spite of "significant amounts of new capacity that has entered the industry looking for outsized returns."
He added, "Clearly, the industry is experiencing a heightened perception of catastrophe risk and/or capacity restrictions as managements employ the updated catastrophe models offered by the major catastrophe-modeling vendors in making their pricing decisions."
According to Moody's catastrophe survey:
o Property-casualty companies are paying greater attention to managing difficult-to-model risk factors by monitoring zonal aggregations, by exiting certain lines of business, or by adhering to more conservative contract terms and conditions.
o Issuers reported a near universal use of models to manage portfolio accumulations, although tie-ins of accumulations management to "front-end" applications, such as pricing of business, were less common–and these varied considerably in sophistication.
Moody's said that catastrophe risk remains a major driver in its rating analysis, "albeit one of many factors discussed in our recently released rating methodology." To understand a company's catastrophe risk, Moody's said it utilizes a combination of approaches, including Moody's Risk Adjusted Capital (MRAC) and a comprehensive survey sent to rated issuers.
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