Chicago - Most of the insurance industry's discussion post-Hurricane Katrina has focused on the significant rating agency model changes and the compounding effect of catastrophe model changes. But a new study by Aon Re Global tells the investor side of the story."Investors clearly understand the differences between insurers and reinsurers and have set differing tolerances for each," says Stephen Mildenhall, Aon Re Services executive vice president and author of the study. "Our study confirms that investors expect higher earnings and capital volatility from reinsurers than they expect from insurers."

Key points in the study show that insurers were allowed capital volatility of 3% to 6% and were allowed to lose slightly more than a quarter of pre-Katrina consensus earnings before significant shareholder value deterioration occurred. Reinsurers on the other hand were allowed capital volatility of 12% to 19% and were allowed to lose an entire year of pre-Katrina consensus earnings before significant shareholder value deterioration occurred.

"Katrina is the first significant natural catastrophe since Northridge and Andrew to truly test the risk and capital management plans of insurers and reinsurers," says Mike Bungert, CEO of Aon Re Inc. "The relative intolerance of catastrophe risk from shareholders as seen through these events is instructive. Shareholders represent a tighter constraint on capital and earnings than rating agencies."

Aon Re offers the Prime Re Dynamic Financial Analysis (DFA) tool, which incorporates investor, rating agency and other constraints as it solves for optimal combinations of underwriting capital. Underwriting capital consists of equity, policyholders' surplus, hybrid instruments, reinsurance, ART products, insurance-linked securities and contingent capital.

Source: Aon Corp.

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