A.M. Best increases surveillance of insurers' catastrophe exposures.

A.M. Best Co. considers catastrophic loss, both natural and manmade, to be the No. 1 threat to the financial strength and credit quality of property and casualty insurers due to the significant, rapid and unexpected impact that can occur. Moreover, immediately following a significant event, the company retains its exposure base, and subsequent events can occur prior to the implementation of any risk mitigation strategies.

Of concern is the rapid escalation in insured exposures over the past decade. Demographic trends and rising property values are driving the property concentration risk in catastrophe-prone areas upward. The evolution of the global economy to a service-based industry has created an unprecedented geographic concentration of workers, thus changing the composition of catastrophe losses to incorporate workers' compensation in earthquakes and terrorist attacks.

Moreover, a tremendous amount of this exposure is passed to insurers that cover homes and businesses in these areas. As a result, the worldwide property and casualty insurance industry's exposure to catastrophe losses continues to rise.

Accordingly, A.M. Best has been increasing its surveillance of catastrophe exposures of primary insurers and reinsurers alike and continues to refine the methodology for evaluating insurers' financial strength to reflect their ability to manage potential losses. Insurers knowingly accept risk with the intent of diversifying the loss, and in order to maintain their ratings, they must demonstrate their financial wherewithal to absorb the potential loss.

Today, most insurers use sophisticated catastrophe modeling tools, primarily those provided by specialized firms with extensive meteorological, seismological, statistical and technological resources, to provide loss estimates. The hurricane events of 2004 and 2005 have reminded us that while the models are extraordinarily useful in the analytical and underwriting process, they are only tools and cannot be relied upon solely for the management of maximum exposures.

Accordingly, A.M. Best still believes the catastrophe models are a valuable tool in monitoring the normal distribution of potential catastrophe losses, and will continue to use modeled output in its evaluation of capitalization through Best's Capital Adequacy Ratio (BCAR). However, A.M. Best also believes that careful monitoring of zonal aggregates is critical to understanding maximum potential loss.