News Analysis - Reaching their limits.

(From Reinsurance)

Byline: Adrian Leonard.

For years canny underwriters and actuaries have been calculating the likely largest loss that could arise under property insurance policies.

Assessing the probable maximum loss allows those that are so inclined to allocate a sufficient but not inefficient amount of capital to that risk. However, making similar predictions for other lines of cover has proved much more difficult. In credit insurance, risk assessment has relied largely on analysis intended to indicate potential default on corporate bonds, but credit insurers believe that existing credit models do not take into account the unique nature of credit insurance exposures.

The need for a solution has been building. "Credit insurers have nominal exposure to certain companies," said Michel Dacorogna, manager of DFA at Converium, "but if you treat that exposure in the same way you treat exposure to bonds, the resulting capital charges are out of range." The result is that, as factors become more important to reinsurers, it begins to look impossible to make money in credit reinsurance, even though the business is less capital intensive than existing models show.

FACTORS FOR CONSIDERATION

Consolidation is another important factor, said Norbert Haible, an underwriter and actuary at Atradius, the credit insurer that emerged from the recent merger of Gerling Credit and NCM. "There is a triangle of partners in credit insurance: policyholders; insurers; and risks (the insureds' own customers), and concentration at each corner." The result is that insurers' exposures tend to be much larger. Consolidation among reinsurers, who typically accept pro rata cessions of up to 70% of primary premium and risk, has multiplied the concentration.