October 23rd, 2013
Posted at 1:00 AM ET
The new hurricane model from RMS, v13, is expected to yield lower loss estimates - however, A.M. Best will not accept a significant reduction in probable maximum losses solely based on the change to v13. Companies should consider multiple views within the model to evaluate a range of outcomes.
Some U.S. states are now allowing qualifying non-U.S. reinsurers to post less than 100 percent of normal collateral levels to allow licensed primary companies to receive Schedule F credit. Despite this change, A.M. Best continues to focus on actual collateral to support reinsurance recoverables, with higher capital charges incurred for reinsurers that do not post 100 percent collateral. Maintaining full collateral helps companies avoid any BCAR capital penalty and provides better reinsurance protection.
Insurers that are overly dependent on the Terrorism Risk Insurance Authorization Act (TRIPRA) may face negative rating pressure when the act expires at the end of 2014. A.M. Best continues to assess the impact of terrorism risk exposure relative to BCAR levels in its discussions with carriers. An A.M. Best TRIPRA briefing is expected to be released in October that will outline A.M. Best’s process in evaluating a company’s exposure and potential rating actions leading up to TRIPRA’s renewal. A.M. Best has identified a list of approximately 50 companies that have significant terrorism exposure and a large dependency on TRIPRA for their financial stability - and if inadequate mitigation measures are not taken some of these companies may be assigned Negative Rating Outlooks in December.In the area of enterprise risk management, companies should communicate to A.M. Best how their strategies are succeeding. A.M. Best will continue to ask companies to quantify emerging risk exposure, and Guy Carpenter advises companies to respond carefully with the appropriate modeling and research.
In 2014, A.M. Best will introduce stochastic modeling of various BCAR components to generate capital charges that are more reflective of company risk. Guy Carpenter expects that this approach may lead to downward rating pressure in 2015 for some companies with unusual underwriting volatility and concentrated cat or casualty exposures - along with modest capitalization for their rating. A.M. Best will report on how the stochastic approach differs from the traditional BCAR technique and will be providing briefings starting in late 2014 to provide adequate time for the industry and “at risk” companies to adjust to the new stochastic-based BCAR model.
Guy Carpenter is engaged in helping our clients navigate all of these changes to help them achieve their ratings and capital management objectives successfully.