In addition, experts say that, globally, Katrina-like events occur more frequently than every 100 years. William Riker, president of RenaissanceRe Holdings, notes that a $50 billion event is a 10-to-15-year event when assessed on a worldwide basis.

Return-times need to be assessed relative to a certain universe--New Orleans, the United States, or the world, he said, noting that the latter assessment is what's required for worldwide reinsurers.

Katrina was not "the big one," he said, noting that on a worldwide basis, RenaissanceRe's view is that 1-in-100-year events are "in the three-digit billions."

Just how rating agencies are changing their approaches to assess insurer readiness to withstand the big one, a smaller one and points in between has became painfully clear to some Bermuda property-catastrophe reinsurers put under review or downgraded by rating agencies recently. However, the changes will apply to every insurer and reinsurer exposed to catastrophes, rating agency representatives explained in reports and interviews recently.

In an early-November report, Standard & Poor's reiterated changes to catastrophe-specific capital charges that the New York-based firm made for reinsurers in June, noting that similar changes are in the works for primary insurers.

S&P said the June change for reinsurers--to an exposure-based capital charge reflecting reinsurers' ability to withstand losses from natural catastrophes that occur once every 250 years--had replaced a previous 1-in-100-year event standard. This change is not just to the number of years. Rather, the new charge encompasses a company's losses from natural disasters in the aggregate, as opposed to those based on a single event.

In 2006, S&P plans to expand the new standard to primary insurers. No changes are in store for Bermuda property-catastrophe specialists, however, as they had already been assessed in this manner, even before the June announcement for reinsurers.

At Fitch, analysts in Chicago and London said they are casting out "return-time" analyses with reference to 100-year or 250-year events altogether. "Given today's environment, we view a single loss point on a loss distribution as simply not adequate," said Peter Patrino, senior director, during a conference call. "Fitch will now evaluate the full-tail risk," using a measure known as T-VaR, or Tail Value-at-Risk.

A report announcing Fitch's new thinking explained that two insurers can both have simulated 100-year losses of $100 million, but exposures to extreme events that vary greatly. One company might have a simulated 500-year-event loss of $200 million, while the other's might be $1 billion. The T-VaR approach captures this because it averages all extreme losses above a selected probability threshold.

Mr. Patrino noted that the new approach will not be applied to catastrophe risk in isolation in Fitch's overall capital analysis. "The [catastrophe] risk will be simulated with other risks, such as asset risks or reserving risks. Then the aggregate of all risks will be looked at together."

He also explained that Fitch recently licensed a model from AIR Worldwide to generate catastrophe loss distributions for its new approach, noting that publicly available data or aggregate loss curves supplied by insurers can be used as model inputs. Rating implications of the new approach are being studied, he said, adding that conclusions and a full set of updated assumptions will be released in three-to-six months.

"Everybody was focusing on one point--the 100-year hurricane PML or 250-year earthquake," Donald Thorpe, a Fitch senior director, told NU. "And anytime you rate to a specific number, companies pick up on that and adapt. The risk goes in places you're not looking," he told NU. "If you only look at the 1-in-100-year PML, then the risk will be further down the curve."

At A.M. Best, Vice President Karen Horvath explained that part of Best's new approach will be to look at one point two times--with a second-event stress test. It will also consider exposures not always included in PMLs, such as demand surge, she said.

Providing some background, she said, "We've always looked at catastrophes [to develop] a view of overall capital....That's really the number-one risk to insurers and reinsurers because it can have the most instantaneous impact to capital position. Loss reserves can be wrong, but they develop over time. Catastrophes can take a company down overnight."

She explained that as part of Best's risk-adjusted view of capitalization--the BCAR model--analysts have always subtracted the after-tax PML for a reasonably severe event from surplus, using the PML for a 1-in-100-year windstorm or 1-in-250-year earthquake from the insurers' models for the deduction.

In addition, over the past few years, Best has been asking: "What's the balance sheet going to look like after an event?" Analysts gross-up loss reserves and recoverables to answer the question, she said.

Referring to the surplus adjustment, she said it's been insufficient in some cases, "because there has been an increase in the frequency of severe events" or because of discrepancies in models sometimes leaving wide gaps between the expected maximum loss and what actually occurred. "Are you including flood? What's the storm surge you're expecting? Did you include demand surge? All these little technical things can make a very big difference," she said.

On a supplementary questionnaire for rated carriers, where Best typically requests information about PML estimates, carriers will now be asked about these other issues. "If a company doesn't include them, we will gross up the estimated loss for our BCAR evaluation," she said.

Explaining the second major change in Best's approach, she said, "We're now subtracting a second full event from your surplus on a stress-tested basis." After a first event occurs, "it may take time to recapitalize or reduce its exposures. You need to be able to have the surplus to withstand that second one," she said, adding that an alternative way to look at this extra capital requirement is as a cushion for the first-event estimate, in case it was too low.

The changes, she said, will be applied to the rating of any company that has exposure to natural or manmade catastrophes.

At S&P, beyond changes to catastrophe criteria, all types of insurers and reinsurers will be subject to an overall update of S&P's risk-based capital model that is not simply focused on catastrophe risk in 2006, the firm said in a second report.

With this "fundamental change in approach," S&P will calculate capital required for a given rating level. For example, the "double-A" capital requirement might be $1.3 billion. Comparing the insurer's actual capital, say $1.1 billion, would show that capital is 15 percent deficient for a "double-A" rating.

The previous approach expressed an insurers' capital adequacy as a ratio and compared it to a benchmark.

S&P said factors used to assess capital needs under its new RBC model--related to asset risks, reserve risks and operational risks--will be updated based on two decades of risk volatility measures. S&P will run the model parallel to the old one in 2006, with the new model becoming favored as its reliability is proven.

In October, S&P announced a new component of its rating analyses--an evaluation of enterprise risk management--to supplement existing rating categories, like capitalization. As part of the ERM initiative, S&P will review dynamic models that insurers may use to try to efficiently match capital to risks (economic capital models). These will be looked at in conjunction with static RBC measures, S&P said.

Moody's Investors Service has not announced any wide-sweeping changes to its ratings' approach. Still, James Eck, assistant vice president, said analysts at the New York-based firm are continually thinking about issues related to catastrophic risk in light of events of the last two years. As for specific methodology changes, he said, they'll "probably be more on the qualitative side."

"On the quantitative side, we continue to work on our capital model, which incorporates catastrophe risk, but we don't use it to create break points [that determine ratings]. It's more of a tool used to focus in on what type of risks the enterprise is facing," he said.

Flag: Going Down

Head: Read 'Em And Weep

Several Bermuda-based property-catastrophe reinsurers faced the ratings' ax from major rating agencies recently. They included:

o Montpelier: Cut to "A-minus" from "A" by A.M. Best; to "triple-B" from "A-minus" by Fitch, a two-notch downgrade; to Baa1 from A3 by Moody's.

o PXRE: Cut to "A-minus" from "A" by A.M. Best and S&P; to "triple-B-plus" from "A-minus" by Fitch.

o IPCRe: Cut to "A" from "A-plus" by A.M. Best; to "triple-B" from "A-minus" by Fitch; to Baa1 from A3 by Moody's.

o RenaissanceRe also saw multiple cuts, but unlike the others, RenRe's downgrades were not solely prompted by hurricane losses. Instead, the resignation of CEO James Stanard spurred the rating actions.

Katrina was not "the big one," according to RenaissanceRe, which considers a 1-in-100-year event "in the three-digit billions."