In its report released on Dec. 13, Moody’s Investors Service
asserts that, in spite of an uncharacteristically quiet 2013
hurricane season, catastrophes will remain a top credit risk
and key area of risk management focus for p&c insurers.
“The U.S. p&c industry’s current strong capital levels enable it to withstand volatility from natural and man-made
catastrophes even up to severe levels such as an event
with a 1-in-250 probability, but the risk nevertheless remains significant for the industry for 2014 and beyond,”
the company explains in the report titled, “Catastrophe
Exposure Remains Key Risk For US P&C Insurance Firms.”
Paul Bauer, Moody’s analyst and author of the report, presents the rating agency’s key credit observations from discussions with company management teams and Moody’s 2013
surveys of p&c catastrophe exposure. The analysis puts
baseline catastrophe losses on average to be equivalent to
between 4 and 6 percent of earned premium in a given year.
Variance in Exposure
Bauer notes that severe storms pose particular risk man-
agement challenges to p&c insurers, even though severe
storms do not threaten capital to extent of hurricanes
and earthquakes. Nevertheless, severe storms can cause
significant earnings volatility and have traditionally been
difficult to model. He also points out that catastrophe
exposure “varies widely by company” but that based on
surveys, even severe catastrophes—or a series of them—
can be absorbed by a moderate portion of equity capital
rather than threatening solvency.
“In the most-exposed quartile of its rated companies,
average loss estimates on a 1-in-250-year basis are 30
percent of policyholders’ surplus net-of-reinsurance,” he
explains. “Conversely, about a quarter of rated p&c companies could withstand a 1-in-250-year loss with an equity
impact of less than 10 percent net of reinsurance.”
Companies continue to enhance their risk management
processes, by better testing model sensitivity, enhancing
data validation, and adjusting modeled results based on
portfolio experience,” Moody’s adds.
Catastrophes Present Key Risks for P&C Insurers
Among Low Probability but High Severity Risks, Hurricanes are Predominant
The chart below shows the relative size of various individually modeled net losses at a 1/250 return period. As illustrated, the largest
potential losses at the low probability but high severity level (the “tail”) come from hurricanes, followed by California earthquake. Note
that though Florida hurricane risk is fairly high in the chart below, it is still lower than it otherwise would be because the data does not
include the public entity Citizens Property Insurance Corporation run by the State of Florida, which is expected to absorb a significant
share of losses in the event of a Florida hurricane. Citizens’ gross hurricane exposure is estimated at about $31 billion for a 1-in-250
event, and significantly exceeds the 1-in-250 PMLs of all of our rated primary P&C companies combined.
Many of the large national property writers rated by Moody’s have been actively working to reduce their exposure to Florida over time,
leaving a greater share of the market not only with Citizens but also with small, unrated regional insurers.
Note: “WS” refers to windstorms, and “EQ” refers to earthquakes. The graph above shows estimated losses
at a 1/250 probability level for individual siloed risks. For example there is a 1/250 probability that a
Florida hurricane would cause a loss equal to about 6% or more of policyholders’ surplus in a given year. Source: Moody’s surveys
Source: Catastrophe Exposure Remains Key Risk For US P&C Insurance Firms