I’m currently on a business trip attending an internal conference. One
subject that’s being disussed at this conference is the potential fallout
from the cat modelers improving their algorithms. So, it seems apropos that
Insurance Journal ran this article Monday:
Standard & Poor’s Ratings Services has revised its criteria
for rating natural peril catastrophe bonds with U.S. hurricane risk
exposure. As a result, some catastrophe bond deals have been placed on
CreditWatch with negative implications[...]“The change has been prompted by recent actions taken by catastrophe
modeling firms, principally Applied Insurance Research (AIR), EQE
International’s EQECAT, and Risk Management Solutions (RMS), to update their
calculations of expected loss,” S&P explained. “AIR and EQECAT are offering
a near-term view of expected loss in addition to their longer term view. RMS
continues to provide one view, but its time horizon has changed to be nearer
term, reflecting the increased frequency and severity of Atlantic Basin
storms.
There’s already been public discussion about the impact of model changes on
cat loads in pricing, reinsurance rates, and insurer capital requirements.
That cat bonds would come under scrutiny is no surprise.