Embed Size (px)
Citation preview
Rating Standards for Cat Risks
Anastasia V. Kartasheva The Wharton School, University of Pennsylvania
Sojung (Carol) Park California State University, Fullerton
September 2009 _____________________________________________________________________
Risk Management and Decision Processes Center The Wharton School, University of Pennsylvania
3730 Walnut Street, Jon M. Huntsman Hall, Suite 500
Philadelphia, PA 19104 USA
Phone: 215-898-4589 Fax: 215-573-2130
http://opim.wharton.upenn.edu/risk/ _____________________________________________________________________
1
RATING STANDARDS FOR CAT RISKS
Anastasia V. Kartasheva The Wharton School, University of Pennsylvania
[email protected] (215) 898-4751
Sojung (Carol) Park California State University, Fullerton
[email protected] (657) 278-3754
Abstract
The paper analyzes how the changes of capital requirements introduced by major rating agencies in the aftermath of hurricane Katrina have affected the capital allocation of insurance companies. New standards forced companies to hold more capital, and the effect is more pronounced for insurers that have exposure to natural catastrophes. At the same time, we show that companies within the same rating category had an asymmetric reaction to new standards. Insurers that are close to the lower boundary of a given rating standard have increased their capital more compared to insurers close to the higher boundary of the standard.
2
INTRODUCTION
In the aftermath of hurricane Katrina in 2005, the major rating agencies have
increased the stringency of ratings standards on capital requirements for insurers. The
changes of the rating methodology and the catastrophic models had a significant
impact on the amount and composition of capital and reinsurance needed to achieve a
particular rating. The objective of the paper is twofold. First, we review the changes
implemented by the rating agencies. Second, we analyze the insurance industry
reaction to these changes.
Both the practitioners and the academics agree that ratings are important for insurers
and reinsurers. Since customer demand is sensitive to insurer’s credit risk, lower
ratings decrease prices that an insurer can charge for the contract. For example,
Epermanis and Harrington (2006) analyze the relationship between premium growth
and changes in A.M. Best financial strength ratings for a large sample of
property/casualty insurers during 1992-1999. They provide evidence of premium
declines for downgraded insurers following the downgrades. The declines were
concentrated in commercial lines and were especially pronounces for companies that
initially had A- rating that is viewed as a threshold between high and average quality
companies.
Ratings standards can also affect the capital allocation and cost of capital in the
reinsurance market. In order to diversify the large catastrophic exposures associated
with hurricane and earthquake in the US, rating agencies encourage reinsurers to
spread their capital across Japanese, European and Australian wind and earthquake
exposures. Diversification results in inadequate capital left for the US market where
the need is the highest. Froot (2008) provides the evidence on capacity shortage in US
exposures and suggests that the S&P “forced diversity” is one of the factors that
would explain the large increase in the costs of reinsurance from 2005 to 2006.
The rest of the paper is organized as follows. In the next section we review the main
changes that have been introduced by major credit rating agencies regarding the
capital requirements for catastrophic exposures in 2006. In Section 3 we analyze how
3
the amount of capital, purchase of reinsurance and the offer of coverage have changed
as a result of new standards.
1. RATING AGENCIES’ APPROACHES TO CATASTROPHE RISKS
Catastrophic losses have the significant, rapid and unexpected impact that can impair
the financial strength and credit quality of P&C insurers. Several factors contributed
to the expansion in insured exposures over the last decade – high demographic
concentration and increasing property values in catastrophe prone areas, etc. Higher
frequency and severity of losses are the main two reasons that rating agencies use to
justify the higher capitalization needed to support catastrophic risks.
The US insurance market is monitored by four credit rating agencies, A.M. Best,
Standard and Poor’s, Moody’s and Fitch. The oldest agency, A.M. Best, was founded
in 1908. A.M. Best enjoyed it monopoly position for most of the 20th century till late
1980s – early 1990s. Beginning 1990s, the monopoly of A.M. Best was challenged by
Standard and Poor’s (S&P) that established a solid position on the market of insurer’s
rating during the 1990s. The entry of S&P was followed by the entry of the other two
agencies, Moody’s and Fitch. According to SEC NRSRO report, these and several
other credit rating agencies issued the total of 24,649 insurers’ ratings in 2008. The
first three agencies, A.M. Best, S&P and Moody’s have fairly equal market shares,
and are followed by Fitch.
Traditionally A.M. Best rating is viewed as a benchmark by customers. It is also
widely incorporated in various local and regulations. Thus the common industry
practice is that a company is rated by A.M. Best and may also have ratings from
several other rating agencies.
In the rest of this section, we review the main changes of capital requirements
introduced by the four major ratings agencies.
1.1 A.M. Best Ratings
The A.M. Best’s Capital Adequacy Ratio (BCAR) for insurers and reinsurers has
statutory capital adjusted to include the after-tax impact of one net catastrophe PML
4
based on the larger of the two events, a one-in-100 windstorm and one-in-250
earthquake event.
There are two main changes that A.M. Best introduced in accounting for cat risks.
First, it proposed to use a scenario-based stress test or aggregate loss exposure rather
than using PML in order to evaluate acceptable catastrophic risk. One consequence of
this change is that the new approach creates a higher threshold for single state writers
than for national insurers. Second, the agency changed the stress test for natural
catastrophes for insurers and reinsurers. The threshold of the stress test to evaluate the
impact to BCAR of a second catastrophe event has been increased from the one-in-50
level wind event to one-in-100 level wind event.
2.2 Standard and Poor’s Ratings
S&P also moved from PML to exposure-based approach to account for catastrophe
exposures. The capital charge for insurers was increased to match the capital charge
that was implemented for reinsurers a year earlier. The charge is based on the net
expected aggregate property losses for all perils at the one-in-250 level. At the same
time, it reduced the risk factors applied to premiums by 5%. Moreover, if the
company can provide sufficient information on its catastrophe load and pricing, and
the company is nationally or globally diversified, the factors can be further reduced to
the levels between 10% and 30%. For companies significantly concentrated in areas
like Florida and Japan, the premium offset factor could be as high as 50%, while a
company concentrated in one location with minimum catastrophic risk might have no
premium factor reduction.
2.3 Moody’s Ratings
Moody’s has increased the capital charges used in its capital model for natural
catastrophe perils. The table below summarized the percentage increase from prior
standards at the one-in-100 and one-in-250 levels.
5
WIND Return period South Atlantic Gulf Mid-Atlantic North
Atlantic 250 59% 307% 83% 24% 100 58% 305% 54% -10%
EARTHQUAKE
Return period
New Madrid (1)
New Madrid (2)
California EQ Pacific NW EQ
250 65% 65% 15% 15% 100 90% 90% 0% 0%
2.4 Fitch Ratings
Previously Fitch focused on one-in-100 catastrophic event. After Katrina, Fitch will
be using AIR’s CATRADER model to evaluate companies’ catastrophic risk based
on a tail value at risk. Fitch projected that the overall capital requirements for insurers
with catastrophe exposure will increase on average by 10 percent.
2.5 Discussion
The short summary of the changes that major CRAs has introduced suggests that
though all rating agencies has increased the capital needed to sustain a particular
rating, there is significant variation in the magnitude of the change. The observation
leads to the next hypothesis.
Hypothesis I: The demand for ratings of the least stringent CRA has increased in
2007. The effect is more pronounced for companies that were put on credit watch or
downgraded by A.M. Best in 2006-2007.
2. HOW DID INSURANCE COMPANIES REACT TO NEW RATING STANDARDS?
An insurance company has several strategies to respond to new capital requirements
in order to maintain its rating. First, an insurer can decide to hold more capital for the
same amount of loss. Since capital can be costly, an insurer may also purchase more
6
reinsurance to reduce the capital cost. The optimal portfolio of capital and reinsurance
depends on the relative prices of the two options.
After the 2004-2005 hurricane seasons, rating agencies not only changed the capital
requirement for insurers, but also increased the capital requirement for reinsurers. In
addition, rating agencies now discount more for reinsurance because they evaluate the
probability of reinsurance companies’ insolvency higher. These two changes result in
relative price (worth) increase (decrease) of reinsurance for insurers. However, it is
likely that the CAT risk related capital requirement increase for reinsurers, which can
diversify the CAT risk relatively better than insurers, are less than insurers for the
same amount of losses. Therefore, reinsurance may still be relatively more efficient
choice than raising more capital for insurers.
When raising capital or purchasing reinsurance to maintain the same supply of
insurance is prohibitively costly, an insurance company can reduce the insurance
supply in cat lines of business. Finally, if the insurer is unable to meet new stringent
capital requirements, it can admit to be downgraded.
To summarize, there are four possible scenarios following the change in rating
standards:
a) Holding more capital for the same amount of loss
b) Assuming more reinsurance to reduce the capital costs
c) Reducing insurance supplies
d) Downgraded
A priori it is unclear which of the four possible scenarios insurance companies may
choose. If the stringency is too tough for insurers to maintain their rating, and
maintaining the rating is simply too costly compared to the benefits, insurers may
choose to be downgraded or cut the CAT risk insurance supplies.
7
In the following, we empirically investigate the reaction of insurers to the change of
the rating criteria after 2004-2005 hurricane seasons. For the purpose of this study,
we focus on the ratings of A.M. Best.
2.1 Testing hypothesis
Since the new standards more significant impact on companies with exposure to
natural catastrophes than of other insurers, we develop the following two hypothesis
regarding the capital changes for exposed and non-exposed insurers.
Hypothesis II CAT risk exposed insurers increase their capital more than non-
exposed insurers.
Hypothesis III CAT risk exposed insurers increase their reinsurance more than non-
exposed insurers.
Also the impact of the new standards must be asymmetric for insurers within the
same rating category. Indeed, A.M. best rating categories pool a substantial number
of insurers in the same group. In each rating group, the firms close to the lower
boundary of each rating category should be more responsive to the change in the
standard. At the same time, firms close to upper bound of each rating category may
still be able to maintain the same rating even after the rating criteria have changed.
Therefore, we can formulate the next hypothesis.
Hypothesis IV Capital and reinsurance change must be stronger for insurers that are
closer to the lower boundary of each rating category.
To test this hypothesis, we rank all companies within the same rating category by
their BCAR score. Then companies with the lowest BCAR score in a category should
have higher reaction than companies with the highest BCAR score in the same
category.
8
2.2 Data
In order to track the difference before and after the 2004-2005 seasons, we consider
the insurers during the period from 1997 to 2007. We include all insurance companies
in Best’s rating file. Among those insurance companies, we exclude those companies
with no premium data or negative total premium. This excludes insurance brokers,
agencies, and underwriters. This also excludes some companies with missing
variables or errors. About 25% of insurance companies in Best’s rating data file
excluded from this step. We only included those insurers with the proportion of
reinsurance between 0% and 100%.
2.3 Methodology
3.3.1 Capital
In order to track companies’ capital change, we use the following variables
1. Surplus
2. Surplus/Asset
3. Net Premium Written/Surplus (Kenney Ratio)
4. Best Capital Adequacy Ratio (BCAR)
The increase in capital corresponds to increase in Surplus, Surplus/Asset ratio and
BCAR, and a decrease in NPW/Surplus ratio.
3.3.2 Reinsurance
In order to track companies’ reinsurance change, we use the following two variables
i.% reinsurance = (Direct Premium Written – Net Premium Written) /
Direct Premium Written
ii.% reinsurance in CAT lines = (Direct Premium Written in CAT related
lines - NPW in CAT lines)/Direct Premium Written in CAT lines
9
3.3.3 Exposed and non-exposed firms
In order to examine the difference between CAT risk exposed firms and non-
exposed firms, we divide insurers into three groups: Hurricane risk exposed firms,
California CAT risk exposed firms, and the rest.
Companies are included in hurricane exposed group if more than 1/3 of their direct
premiums are written in FL, NC, SC, GA, TX, LA, MS, AL, and more than 1/3 of
their direct premiums are written in Allied, Multiple Peril, Inland Marine.
Companies are included in California CAT group if more than 1/3 of their direct
premiums are written in CA, and more than 1/3 of their direct premiums are written
in Allied, Multiple Peril, Inland Marine, Earthquake, Fire.
If we apply this rule year by year, for some firms, they become exposed in some
years and become non-exposed in some other years. For example, if a firm has 30%
of premium written in Hurricane states in 2003, 35% in 2004, 30% in 2005, etc.,
then this firm will be included in the exposed group in 2004 but not other years.
Because we do not have large number of companies for the exposed group, including
and excluding certain firms each year can affect the trend numbers year by year.
Therefore, hurricane exposed group only includes those firms assigned to hurricane
group every year between 2002 and 2007. The same rule is applied to California
CAT group and non-exposed group. In order not to exclude too many firms from the
sample, we limit the sample period to 2002-2007 (instead of 1997-2007). However,
we still track the variables between 1997 and 2001.
3.3.4 Best Capital Adequacy Ratio
Best’s Capital Adequacy Ratio (BCAR) is an integrated review of an insurance
company’s underwriting, financial and asset leverage. The table below provides the
details of BCAR guidelines published by A.M. Best for a company to achieve a
particular rating.
10
Minimum BCAR Guidelines
Rating Implied Balance Sheet Minimum
A++ 175 A+ 160 A 145 A- 130
B++ 115 B+ 100 B 90 B- 80
C++ 70 C+ 60 C 50 C- 40 D 0
As the following table shows, the BCAR score needed to achieve a particular
rating has changed significantly over the last ten years.
Rating Mean (1997) Mean (2007) A++ 144.24 306.02 A+ 135.40 278.19 A 128.99 255.25 A- 120.07 262.73
B++ 107.12 247.66 B+ 109.13 291.39 B 83.10 175.48 B- 74.54 159.98
C++ 64.50 83.14 C+ 48.70 86.50 C 47.74 87.90 C- 73.90 D 32.30 E 0 F 0
We create three BCAR groups in order to test whether firms close to the upper
bound of each category and firms close to the lower bound of each category react
differently. The rationale for this is that the firms close to the lower boundary will
11
have to be more pro-active in order to maintain the rating, whereas the firms close
to higher boundary may still be safely in the same rating category after the rating
standard change. That is, if we find capital increase after 2004-2005, we will find
more increase from the firms close to the lower boundary of each rating category.
To test Hypothesis IV, we make three groups using BCAR score. First, we
compute BCAR Q1, Q3 for each rating category and each year. Second, we assign
BCAR high group if a firm’s BCAR is greater than Q3 of corresponding rating
category /year. For example, consider an A+ company with BCAR=200 in 2005.
We first compute BCAR Q1 and Q3 for A+ in 2005, equal to 210 and 240
respectively. Since 200 is less than 210, this company is close to lower bound of
A+, and it is assigned to the lower group. We repeat making BCAR groups every
year, and thus the firms in each group may change year by year.
3.3.5 Tracking insurers capital/reinsurance change year by year
We examine capital and percentage reinsurance change after 2004-2005 hurricane
seasons. Our hypothesis is CAT exposed insurers in low BCAR group will change
their capital/reinsurance the most. The change from 2004 to 2005, 2005 to 2006,
and 2006 to 2007 are examined.
We also separate the companies by their ratings. We hypothesize that investment
graded firms may care more their ratings than non-investment rating firms. The
rationale is that if the insurers’ rating is essential to their business, they should
have maintained good ratings. As a result, we expect the response to the rating
standard change will be stronger for investment-level insurers.
12
4. RESULTS
Table 1. Capital, reinsurance, rating, and direct premium written change from 1997 to 2007.
Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007Panel1. Non-exposed group
N 351 477 488 515 541 574 574 574 574 574 574Rating 4.05 3.65 3.61 3.68 3.68 3.79 3.75 3.76 3.68 3.64 3.62Surplus(thousand) 185 117 120 113 109 107 229 151 169 194 211Surplus/Asset 0.47 0.46 0.47 0.46 0.42 0.41 0.46 0.41 0.42 0.43 0.44Premium/Surplus 0.98 0.98 0.94 1.04 1.13 1.22 1.13 1.12 1.04 0.95 0.89BCAR 119.3 137.0 237.8 247.6 230.6 218.9 218.7 223.3 235.2 253.6 266.1DPW(million) 157 148 152 159 176 204 234 251 260 270 272%Reinsurance 0.32 0.34 0.35 0.35 0.36 0.38 0.38 0.37 0.36 0.36 0.36Panel 2. Hurricane CAT risk exposed group
N 18 29 29 33 36 36 36 36 36 36 36Rating 3.67 3.72 3.66 3.52 3.42 3.47 4.33 3.47 3.72 3.78 3.69Surplus(thousand) 175 80 102 104 88 92 1359 106 116 140 154Surplus/Asset 0.52 0.59 0.60 0.59 0.55 0.49 0.48 0.48 0.49 0.52 0.54Premium/Surplus 0.91 0.85 0.80 0.86 0.97 1.34 1.21 1.04 0.90 0.96 0.81BCAR 141.3 142.8 251.5 303.5 278.1 240.6 215.9 232.7 230.7 242.9 282.7DPW(million) 144 124 148 146 147 172 197 213 221 231 227%Reinsurance 0.30 0.30 0.32 0.33 0.32 0.34 0.39 0.39 0.40 0.36 0.40Panel 3. California CAT risk exposed group
N 8 13 11 15 15 15 15 15 15 15 15Rating 4.87 3.92 3.18 3.13 3.47 3.67 3.87 3.73 3.67 3.47 3.47Surplus(thousand) 370 61 72 52 53 54 577 71 83 102 114Surplus/Asset 0.51 0.45 0.42 0.48 0.45 0.40 0.58 0.40 0.39 0.43 0.44Premium/Surplus 1.12 1.06 1.13 1.05 1.07 1.19 1.14 1.17 1.20 0.91 0.86BCAR 131.3 121.3 223.0 254.7 215.7 175.6 224.2 178.0 230.0 261.4 272.9DPW(million) 207 156 186 149 166 195 216 225 236 247 254%Reinsurance 0.27 0.39 0.40 0.40 0.43 0.45 0.48 0.44 0.35 0.39 0.38
13
Table 2. Capital, rating, and reinsurance changes by BCAR group after 2004-2005 hurricane seasons
BCAR high in group
Whole Sample A- or higher rating only B++ or lower rating only
Year 2005 2006 2007 2005 2006 2007 2005 2006 2007
Surplus/Asset Hurricane -0.0371 -0.0195 0.0200 0.0080 0.0037 0.0238 -0.0953 -0.1046 0.0087
Non-exp -0.0006 -0.0304 -0.0163 0.0022 0.0053 0.0051 -0.0088 -0.0140 -0.0044
Premium/Surplus Hurricane 0.8385 0.1779 0.0022 -0.0049 0.0022 0.0236 2.0230 0.8221 -0.0621
Non-exp -0.0167 0.0007 0.0032 -0.0241 -0.0215 -0.0298 0.0054 0.0425 0.0390
Rating Hurricane 0.6366 0.0714 -0.1875 0.0833 0.1818 0.0000 1.3333 -0.3333 -0.7500
Non-exp -0.0539 -0.0304 -0.0163 -0.0556 -0.0171 -0.0306 -0.0492 -0.0727 0.0408
BCAR Hurricane -69.8682 -22.2851 40.8733 2.3583 -8.9909 46.3273 -160.6222 -71.0333 25.8750
Non-exp 0.0432 0.7811 13.7100 2.1876 10.3890 16.2120 -6.5379 -29.2655 3.9061
% same rating Hurricane 0.7727 0.7857 0.8125 0.9167 0.8182 0.8333 0.6667 0.6667 0.7500
Non-exp 0.9170 0.8957 0.9224 0.9389 0.9371 0.9592 0.8525 0.7636 0.7755
% downgraded Hurricane 0.2273 0.1429 0.0625 0.0833 0.1818 0.0833 0.3333 0.0000 0.0000
Non-exp 0.0166 0.0391 0.0286 0.0056 0.0229 0.0051 0.0492 0.0909 0.1224
% upgraded Hurricane 0.0000 0.0714 0.1250 0.0000 0.0000 0.0833 0.0000 0.3333 0.2500
Non-exp 0.0664 0.0652 0.0490 0.0556 0.0400 0.0357 0.0984 0.1455 0.1020
% reinsurance Hurricane 0.0207 -0.0358 0.0287 0.0220 -0.0182 0.0128 -0.0218 -0.1007 0.0763
Non-exp -0.0083 -0.0054 0.0032 -0.0067 -0.0054 0.0015 -0.0131 -0.0056 0.0096
14
BCAR med in group
Whole Sample A- or higher rating only B++ or lower rating only
Year 2005 2006 2007 2005 2006 2007 2005 2006 2007
Surplus/Asset Hurricane 0.0005 0.0156 0.0287 -0.0094 0.0221 0.0316 0.0345 0.0017 0.0266
Non-exp 0.0079 0.0175 0.0128 0.0078 0.0141 0.0168 0.0083 0.0276 -0.0001
Premium/Surplus Hurricane -0.1822 0.0609 -0.1518 -0.0890 0.0454 -0.0933 -0.5035 0.0939 -0.3070
Non-exp -0.0716 -0.1290 -0.0545 -0.0744 -0.1159 -0.0769 -0.0639 -0.1688 0.0176
Rating Hurricane 0.0750 -0.0682 -0.0370 0.0000 0.0000 0.0263 0.3333 -0.2143 -0.2000
Non-exp -0.0553 -0.0632 -0.0043 -0.0515 -0.0899 -0.0197 -0.0656 0.0175 0.0450
BCAR Hurricane 3.3487 24.1955 32.0000 -0.1267 33.4367 25.9789 14.9333 4.3929 50.0780
Non-exp 13.0047 23.4202 13.3367 13.7021 21.7113 15.5292 11.1140 28.5743 6.3243
% same rating Hurricane 0.675 0.8409 0.925926 0.741935 0.8667 0.973684 0.4444 0.7857 0.8000
Non-exp 0.9071 0.8736 0.8929 0.9515 0.9043 0.9101 0.7869 0.7807 0.8378
% downgraded Hurricane 0.1750 0.0455 0.0185 0.1290 0.0667 0.0263 0.3333 0.0000 0.0000
Non-exp 0.0177 0.0305 0.0535 0.0030 0.0058 0.0393 0.0574 0.1053 0.0991
% upgraded Hurricane 0.15 0.1136 0.055556 0.129032 0.0667 0 0.2222 0.2143 0.2000
Non-exp 0.0752 0.0959 0.0535 0.0455 0.0899 0.0506 0.1557 0.1140 0.0631
% reinsurance Hurricane 0.0161 -0.0275 0.0240 0.0103 -0.0518 0.0170 0.0358 0.0247 0.0412
Non-exp -0.0091 0.0032 0.0084 0.0007 -0.0014 0.0117 -0.0357 0.0172 -0.0022
15
BCAR low in group
Whole Sample A- or higher rating only B++ or lower rating only
Year 2005 2006 2007 2005 2006 2007 2005 2006 2007
Surplus/Asset Hurricane 0.0451 0.1203 0.0417 0.0315 0.1254 0.0383 0.0586 0.1061 0.0484
Non-exp 0.0100 0.0105 0.0114 0.0087 0.0062 0.0100 0.0152 0.0252 0.0162
Premium/Surplus Hurricane -0.4507 -0.3099 -0.1902 -0.4343 -0.1515 -0.1428 -0.4671 -0.7533 -0.2849
Non-exp -0.0792 -0.1010 -0.0871 -0.0661 -0.0737 -0.0866 -0.1325 -0.1933 -0.0889
Rating Hurricane 0.5000 0.0526 -0.0556 0.0000 0.0000 -0.0833 1.0000 0.2000 0.0000
Non-exp -0.0644 -0.0437 -0.0415 -0.1070 -0.0879 -0.0691 -0.1325 0.1111 0.0566
BCAR Hurricane 29.9615 49.1438 34.9133 46.1600 42.7818 37.6444 19.8375 63.1400 30.8167
Non-exp 21.7091 21.9338 17.0575 23.7078 23.9076 16.5080 14.5512 15.7360 18.8285
% same rating Hurricane 0.75 0.9474 0.944444 1 1.0000 0.916667 0.5000 0.8000 1.0000
Non-exp 0.8927 0.8771 0.9046 0.8984 0.8956 0.9043 0.8696 0.8148 0.9057
% downgraded Hurricane 0.2500 0.0526 0.0000 0.0000 0.0000 0.0000 0.5000 0.2000 0.0000
Non-exp 0.0258 0.0424 0.0415 0.0107 0.0165 0.0319 0.0870 0.1296 0.0755
% upgraded Hurricane 0 0.0000 0.055556 0 0.0000 0.083333 0.0000 0.0000 0.0000
Non-exp 0.0815 0.0805 0.053942 0.0909 0.0879 0.06383 0.0435 0.0556 0.0189
% reinsurance Hurricane 0.0346 0.0503 0.0361 0.0617 0.0043 0.0442 0.0074 0.1790 0.0198
Non-exp -0.0031 0.0119 -0.0057 -0.0016 0.0092 -0.0059 -0.0091 0.0212 -0.0050
Note:
2005: change from 2004 to 2005, 2006: change from 2005 to 2006, 2007: change from 2006 to 2007
16
Table 3. Capital, rating, and reinsurance changes by BCAR group after 2004-2005 hurricane
seasons: tracking same companies from 2002 to 2007 based on the BCAR group in 2002.
Year 2002 2003 2004 2005 2006 2007
BCAR high in group (N hurricane=16)
Surplus/Asset Hurricane 0.4783 0.4706 0.4862 0.4802 0.4741 0.5030
Non-exp 0.3552 0.4595 0.3684 0.3834 0.3998 0.4138
Premium/Surplus Hurricane 1.2807 1.2781 0.9935 0.9440 1.1160 0.9541
Non-exp 1.4596 1.1384 1.3262 1.2044 1.1010 1.0479
Rating Hurricane 3.2000 3.4000 3.2000 3.6000 3.7000 3.6000
Non-exp 3.8815 3.5958 3.8049 3.7247 3.6690 3.6341
BCAR Hurricane 182.7900 199.8900 206.8300 199.6600 194.5700 201.9700
Non-exp 181.5848 222.3097 197.9035 205.6237 228.4656 244.5726
% reinsurance Hurricane 0.2609 0.2725 0.2937 0.3195 0.2765 0.3458
Non-exp 0.3725 0.3688 0.3542 0.3481 0.3408 0.3370
% CAT reins Hurricane 0.3012 0.3058 0.3276 0.3476 0.3178 0.3937
BCAR med in group (N hurricane=10)
Surplus/Asset Hurricane 0.3514 0.5048 0.4053 0.4130 0.4546 0.5008
Non-exp 0.3683 0.4604 0.3731 0.3766 0.3889 0.4000
Premium/Surplus Hurricane 2.1108 0.9852 1.2360 0.9890 1.1280 0.8817
Non-exp 1.2957 1.1739 1.0962 1.0332 0.9317 0.8577
Rating Hurricane 3.8333 4.7500 3.5833 3.7500 3.6667 3.6667
Non-exp 3.6667 4.0000 3.7589 3.6525 3.6099 3.6525
BCAR Hurricane 135.1700 207.4181 170.6900 173.2900 198.6181 257.5273
Non-exp 139.7401 199.6262 173.5721 190.7607 212.4355 219.9430
% reinsurance Hurricane 0.3914 0.5014 0.5027 0.5162 0.4076 0.4296
Non-exp 0.4777 0.4869 0.4857 0.4775 0.4818 0.4662
% CAT reins Hurricane 0.4483 0.5355 0.5384 0.5255 0.4378 0.4591
BCAR low in group (N hurricane=12)
Surplus/Asset Hurricane 0.6107 0.4638 0.5522 0.5654 0.5971 0.6004
Non-exp 0.5491 0.4682 0.5295 0.5334 0.5400 0.5458
Premium/Surplus Hurricane 0.7230 1.3416 0.9082 0.7994 0.6923 0.6342
Non-exp 0.6740 1.0822 0.7347 0.7040 0.6651 0.6231
Rating Hurricane 3.3571 4.6428 3.5786 3.7857 3.9286 3.7857
17
Non-exp 3.7123 3.8151 3.6575 3.6164 3.6233 3.5616
BCAR Hurricane 364.9500 237.1250 295.5071 293.8857 312.3214 360.2000
Non-exp 400.5661 223.9552 355.7075 366.9791 380.9475 397.6325
% reinsurance Hurricane 0.3413 0.3683 0.3508 0.3672 0.3748 0.4097
Non-exp 0.6107 0.4638 0.5522 0.5654 0.5971 0.6004
% CAT reins Hurricane 0.5491 0.4682 0.5295 0.5334 0.5400 0.5458
5. GRAPHS AND TENTATIVE CONCLUSIONS
a. Capital
Surplus/Asset
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Non‐exposed
Hurricane‐exposed
California
Premium/Surplus
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Non‐exposed
Hurricane‐exposed
California
18
BCAR
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Non‐exposed
Hurricane‐exposed
California
On average, capital of CAT risk exposed insurers and non-exposed insurers do not show very
different pattern during the sample period of 1997-2007.
19
Change by BCAR group - Surplus/Asset
Whole group
‐0.0600
‐0.0400
‐0.0200
0.0000
0.0200
0.0400
0.0600
0.0800
0.1000
0.1200
0.1400
2005 2006 2007
Hurricane high
Non‐exposed high
Hurricane low
Non‐exposed low
Investment graded (A- and higher) insurers only
0.0000
0.0200
0.0400
0.0600
0.0800
0.1000
0.1200
0.1400
2005 2006 2007
Hurricane high
Non‐exposed high
Hurricane low
Non‐exposed low
Tracking the same firms from 2002 to 2007
20
0.0000
0.1000
0.2000
0.3000
0.4000
0.5000
0.6000
0.7000
2002 2003 2004 2005 2006 2007
Hurricane high
Non‐exposed high
Hurricane low
Non‐exposed low
Although the aggregated numbers show that the capital changes of exposed insurers and non-
exposed insurers are not very different, the BCAR group result shows different pattern.
- Hurricane exposed low BCAR group insurers increased their capital after 2004-2005 hurricane
seasons more than other insurers.
- The difference between exposed and non-exposed group firms is bigger for BCAR low group
insurers than high group insurers. Both groups have similar Surplus/ASSET in 2002, but
hurricane low group’s Surplus/Asset is 0.5 whereas non-exposed low group’s Surplus/Asset is
0.4 in 2007.
- Hurricane exposed high BCAR group insurers depleted their capital from 2004 to 2005, but
gradually increase their capital afterwards.
- When we only focus on the investment graded insurers, hurricane exposed high BCAR group
insurers did not deplete their capital from 2004 to 2005.
21
b. % Reinsurance
0.00
0.10
0.20
0.30
0.40
0.50
0.60
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Non‐exposed
Hurricane‐exposed
California
Change by BCAR group, Whole group
‐0.0500
‐0.0400
‐0.0300
‐0.0200
‐0.0100
0.0000
0.0100
0.0200
0.0300
0.0400
0.0500
0.0600
2005 2006 2007
Hurricane high
Non‐exposed high
Hurricane low
Non‐exposed low
Investment graded (A- and higher) insurers only
‐0.0300
‐0.0200
‐0.0100
0.0000
0.0100
0.0200
0.0300
0.0400
0.0500
0.0600
0.0700
2005 2006 2007
Hurricane high
Non‐exposed high
Hurricane low
Non‐exposed low
22
Tracking the same firms from 2002 to 2007
0.0000
0.1000
0.2000
0.3000
0.4000
0.5000
0.6000
2002 2003 2004 2005 2006 2007
Hurricane high
Non‐exposed high
Hurricane low
Non‐exposed low
- Non-exposed insurers did not change or slightly reduced % reinsurance during the sample
period.
- CAT exposed insurers increased % reinsurance from 2004 to 2005, reduced it 2005 to 2006,
then increased it again from 2006 to 2007.
-
23
c. Rating
0.00
1.00
2.00
3.00
4.00
5.00
6.001997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Non‐exposed
Hurricane‐exposed
California
Change by BCAR group, Whole group
‐0.3000
‐0.2000
‐0.1000
0.0000
0.1000
0.2000
0.3000
0.4000
0.5000
0.6000
0.7000
2005 2006 2007
Hurricane high
Non‐exposed high
Hurricane low
Non‐exposed low
Investment graded (A- and higher) insurers only
‐0.1500
‐0.1000
‐0.0500
0.0000
0.0500
0.1000
0.1500
0.2000
2005 2006 2007
Hurricane high
Non‐exposed high
Hurricane low
Non‐exposed low
24
Tracking the same firms from 2002 to 2007
0.0000
0.5000
1.0000
1.5000
2.0000
2.5000
3.0000
3.5000
4.0000
4.5000
5.0000
2002 2003 2004 2005 2006 2007
Hurricane high
Non‐exposed high
Hurricane low
Non‐exposed low
Overall, ratings did not change that much during the sample period. That is, most insurers
maintain their ratings most of the time.
Some exposed insurers were downgraded from 2004 to 2005 and more from 2005 to 2006, but
some recovered their original rating in 2007.
25
d. Total Direct Premium Written
0.00
50000000.00
100000000.00
150000000.00
200000000.00
250000000.00
300000000.00
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Non‐exposed
Hurricane‐exposed
California
Change by BCAR group, Whole group
0
5000000
10000000
15000000
20000000
25000000
30000000
2005 2006 2007
Hurricane high
Non‐exposed high
Hurricane low
Non‐exposed low
Investment graded (A- and higher) insurers only
26
‐6000000
‐4000000
‐2000000
0
2000000
4000000
6000000
8000000
10000000
12000000
14000000
2005 2006 2007
Hurricane high
Non‐exposed high
Hurricane low
Non‐exposed low
Tracking the same firms from 2002 to 2007
0
100000000
200000000
300000000
400000000
500000000
600000000
2002 2003 2004 2005 2006 2007
Hurricane high
Non‐exposed high
Hurricane low
Non‐exposed low
Overall, premium increased during the sample period. However, hurricane exposed insurers’
premium decreased a bit from 2006 to 2007.
It seems that the decrease was driven by BCAR low group insurers.
27
APPENDIX - LIST OF INSURERS
Hurricane Exposed insurers
ANPAC Louisiana Insurance Company ASI Lloyds Alabama Municipal Insurance Corporation Alfa Mutual General Insurance Company American National Lloyds Insurance Company American Resources Insurance Company, Incorporated American Strategic Insurance Corp. American Western Home Insurance Company Amica Lloyd's of Texas Armed Forces Insurance Exchange Auto Club South Insurance Company Columbia Lloyds Insurance Company Cotton States Mutual Insurance Company Delta Lloyds Insurance Company of Houston Texas Florists' Insurance Company Georgia Farm Bureau Mutual Insurance Company Grain Dealers Mutual Insurance Company Hartford Lloyd's Insurance Company Middle Georgia Mutual Insurance Company Mutual Savings Fire Insurance Company National Fire and Indemnity Exchange National Lloyds Insurance Company Nationwide Insurance Company of Florida Nationwide Mutual Fire Insurance Company North Carolina Farm Bureau Mutual Insurance Company Priority One Insurance Company Service Insurance Company Slavonic Mutual Fire Insurance Association Southern Mutual Church Insurance Company Southern Mutual Insurance Company Southern Trust Insurance Company State Farm Florida Insurance Company Triangle Insurance Company, Inc. USAA Texas Lloyd's Company USPlate Glass Insurance Company Voyager Indemnity Insurance Company
28
California insurers
Associated Indemnity Corporation California Capital Insurance Company California Mutual Insurance Company Century-National Insurance Company Crusader Insurance Company Exact Property and Casualty Company Financial Pacific Insurance Company Fire Insurance Exchange First American Property & Casualty Insurance Company GeoVera Insurance Company Golden Eagle Insurance Corporation Merced Mutual Insurance Company Meritplan Insurance Company Newport Insurance Company Pacific Select Property Insurance Company Pacific Specialty Insurance Company Residence Mutual Insurance Company Sequoia Insurance Company Truck Insurance Exchange Unigard Indemnity Company Unigard Insurance Company Western Mutual Insurance Company White Mountains Reinsurance Company of America
29
Rating conversion table
Rating Numerical rating assigned A++ 1 A+ 2 A 3 A- 4
B++ 5 B+ 6 B 7 B- 8
C++ 9 C+ 10 C 11 C- 12 D 13 E 14 F 15
