A.M. Best softens cat stress test for prepared insurers

A.M. Best Co. is making modifications to its catastrophe stress test, which in some cases will require less capital for a company to support its catastrophe exposure. The ratings agency says “those companies that would be afforded additional leeway in the catastrophe stress test [would have to] demonstrate a strong understanding of their catastrophe exposure, sound catastrophe risk management and the financial flexibility to replace a significant amount of lost capital after an event.”More stringent capital requirements will remain in place for companies that continue to use less conservative modeling tools; are perceived to have weak catastrophe management or have limited financial flexibility, A.M. Best reported. In establishing the level of capital requirements within the catastrophe stress tests, A.M. Best considers expectations relating to data quality, overall catastrophe management, the historical accuracy of the catastrophe model output and the potential for enhancements to the catastrophe models.A.M. Best reported it has heard many anecdotal tales of insurers “model shopping” in an effort to find the catastrophe model with the lowest indication of probable maximum loss (PML), as well as other ways to manage the rating analysis. “A.M. Best encourages all companies to manage their catastrophe exposure, not the rating analysis,” the ratings agency said.”There are several commercial catastrophe models and many private models that are used within the insurance industry. The model or models a company chooses to use should be based on the best interest of the company in understanding their catastrophe risk.”In some cases, such as a single state writer, a scenario-based stress test or aggregate loss exposure may be a much better way to evaluate acceptable catastrophe risk than using a PML.”A.M. Best will also consider the quality of data captured, model differences and management’s ultimate decisions in their management of catastrophe exposure.”