Benign 2006 bodes well for monolines

Given the benign 2006 storm season, mild activity bodes well for investors in catastrophe-focused carriers and in alternative risk-transfer vehicles, Moody's concludes in a new report.

Moody's believes this reduced storm activity could also signal softening market conditions for peak catastrophe zones at some time in 2007, but expects that the majority of P&C insurer ratings will remain stable.

"After the difficult 2004-2005 seasons," says Moody's vice president Pano Karambelas, an author of the report, "insurers and reinsurers chose to be very proactive during 2006." He points out that "they focused additional attention on catastrophe risk management, thereby enhancing the involvement of company directors and risk committees, as well as pursuing initiatives such as shedding exposures, increasing prices, and purchasing additional reinsurance (or alternative risk transfer) protection."

Moody's recent catastrophe survey arrived at the following key conclusions:

• P&C Companies are paying greater attention to managing difficult-to-model risk factors by monitoring zonal aggregations, by exiting certain lines of business, or by adhering to more conservative contract terms and conditions;
• Companies are, more often than not, turning on the switches for demand surge, storm surge, and fire following;
• Issuers reported a near universal use of models to manage portfolio accumulations, although tie-ins of accumulations management to "front-end" applications (eg pricing of business), were less common, and these varied considerably in sophistication; and
• Issuers are more aware of the importance of capturing accurate exposure data, particularly commercial lines, beyond precise location coding capabilities.