A.M. Best Analysts: Probable Maximum Loss a Starting Point, Not Final Determinant, for Rating Discussion

Copyright:	(c) 2011 A.M. Best Company, Inc.
Source:	A.M. Best Company, Inc.
Wordcount:	500

The probable maximum loss is a starting point for a discussion between property/casualty insurers and A.M. Best analysts when reviewing ratings – not the final determinant.

"There is a common misconception that we get the model output from a company, we put it in to our BCAR model, and that's the end of the discussion, and that can't be any further from the truth" said Anthony Diodato, group vice president of property/casualty ratings, referring to Best's Capital Adequacy Ratio, a measure of an insurer's financial soundness.

In establishing or reviewing financial strength ratings of carriers, A.M. Best analysts want to engage companies in a discussion of how much risk they are taking on, Diodato said.

"We may start with a model output, but we're expecting – and the better risk managers are able to do this – [a company to say] 'this is the number we got from the model, but, because of the characteristics of our book of business ... this is more of a reflection of how much risk we’re taking, and this is what we're building into our risk-tolerance profile.'"

Diodato spoke during an A.M. Best webinar entitled Risk Management and Catastrophe Models, held in part in response to an updated version of the hurricane model from Risk Management Solutions Inc., released in February (BestWire, Feb. 28, 2011) which incorporates greater risk for inland areas and increases the PML for some carriers.

"When there is a model update, we expect companies to provide to us that new view of risk," said Richard Attanasio, vice president of property/casualty ratings at A.M. Best. "But, more importantly, we expect them to provide to us their assessment of it – how they view the new model relative to their book of business."

A.M. Best also conducts stress testing using a second event, said A.M. Best Vice President Thomas Mount.

"We not only want them to absorb one event and be done. We want them to be an ongoing operation," said Mount. He added A.M. Best also examines the quality of the data used in the models and what types of coverages are included.

A.M. Best has changed no ratings of a company solely because of the RMS software update, Diodato said. He acknowledged there have been some companies that have been placed on negative outlook because they have had capital erosion over the past years and now "their assessment of risk that they’re providing us is different than what it was."

A.M. Best doesn't recommend one modeling firm over another, nor does it require carriers to use multiple models. If multiple models are used, A.M. Best considers all of them, taking the average, but the average can be weighted, in conjunction with discussions with the carrier.

Brokers have said they hope insurers don't have a "knee jerk" response to the latest RMS model (BestWire, May 9, 2011). Other modeling firms include Eqecat Inc. and AIR Worldwide Corp.

To see the entire webinar, visit http://www.ambest.com/webinars/rmc11.

(By Diana Rosenberg, senior associate editor, BestWeek)