How Are Rating Agencies Handling Cat Risk in ERM Evaluations?
Standard & Poor’s considers extreme-event (cat risk) management one of three pillars in an insurer’s ERM framework and is using cat risk management practices as one of five criteria for classifying an insurer’s ERM capabilities as excellent, strong, adequate, or weak. Fitch’s Prism model directly incorporates cat modeling results from AIR’s CATRADER® product — both in isolation and through correlation assumptions with the other risks modeled in Prism — into its quantitative relationships that determine estimates of economic capital. This formalizes the connection between ERM and cat risk management practices. Finally, A.M. Best has made major changes to its Supplemental Rating Questionnaire that more robustly address cat risk. Quantification is expected of the Tail Value at Risk (TVaR, statistically the average of simulated annual losses beyond a given severity threshold), in addition to the historical statistics of Probable Maximum Loss (PML, percentile of the annual loss distribution
