S&P Supports Multiple Catastrophe Model Approach For Insurers

In the wake of widespread disaster-related losses for insurers and reinsurers, ratings firm Standard & Poor's is reiterating its call for the use of multiple catastrophe models.

In a press release, the firm said it preferred use of models from at least two of the big three modeling firms when assessing the catastrophe risk for natural peril catastrophe bonds. “To date, during the rating process, issuers have almost always provided views from only one of the three main modeling agencies: RMS, EQECAT Inc., or AIR,” the release states. “Despite this, in conversations with sponsors, modeling agencies, and investors, we have regularly expressed our interest in looking at results from more than one model when rating catastrophe bonds.”
 
S&P says its criteria still allows the use of a single model when assessing catastrophe risk, but contends that using multiple models would increase transparency in the market and lower the risk of "model shopping" where risk managers purposely select the model that gives them the most desirable results.

“The risks being modeled are typically low frequency and high severity in nature. Loss estimates from an event, or the likelihood of an event, can differ significantly between modeling agencies, according to how the data is interpreted. We therefore consider that a multiple-model approach would give existing and potential investors a better perspective on the range of potential outcomes. While it would not eliminate uncertainty, it should provide a greater insight into the risk a deal presents, and to some extent, address the perceived issue of "model shopping."

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