Ratings agencies increase scrutiny of cat risk for Asian reinsurers

Friday, 3 December 2010 09:09 - - {{hitsCtrl.values.hits}}

Aon Benfield, the world’s premier reinsurance intermediary and capital advisor, is advising reinsurers that rating agencies are likely to increase their scrutiny of catastrophe risk in Asia and that many companies will have to make substantial investments to address this.

There are many changes occurring in the way rating agencies are analyzing reinsurers. The recent Indonesian earthquake and the flooding in Pakistan are recent evidence of the region’s exposure to natural disasters. The events in Indonesia and Pakistan, while causing extensive local devastation, have not severely impacted global reinsurers due to low insurance penetration in these countries.

However, as insurance penetration grows and economies develop in Asia Pacific, reinsurers will play an increasingly important role in funding the recovery from such disasters. This will increase rating agency scrutiny of reinsurer catastrophe risk, including the quality of data collected, the systems used to monitor exposures and the models used to determine Probable Maximum Losses.

Rating agencies have been restricted in their analyses due to the lack of catastrophe models for many Asian perils, in particular flood and tsunami. Also, many insurers historically relied on CRESTA level aggregates with little detail. Data quality is improving as insurers invest in systems capable of capturing location and construction information of a global best practice standard.

Rade Musulin, COO of Aon Benfield Analytics in Asia Pacific, said: “While rating agencies have always considered catastrophe risk in rating companies in Asia Pacific, their focus on the issue will increase as the insurance system plays a greater role in funding natural disaster losses in the region. Reinsurers with significant catastrophe exposure wishing to earn strong ratings will have to make substantial investments in several areas such as technological solutions to capture data and human capital to evaluate, underwrite, price, and reinsure property exposures. Many of these tasks will take years to implement, meaning reinsurers in Asia Pacific must make investments today to meet requirements likely to be imposed in coming years.”

Kelly Superczynski, global head of Aon Benfield Analytics’ Rating Agency Advisory group, said: “Rating agencies are focused on catastrophe risks for reinsurers that are underwriting property exposure in regions subject to natural disasters, which has been standard practice for quite some time now. Globally what differs is the sophistication and ability for companies to measure this with some degree of accuracy, and the rating agencies’ expectation is that this will improve in many of the ‘emerging markets’ in the near future.

“With catastrophe risk playing an important role in deciding the insurer’s capital adequacy, rated companies must demonstrate how they monitor their exposures, how they measure the possible financial impact of natural disasters, and how they plan to fund losses through reinsurance or other sources of capital.”