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A.M. Best's Methodology: Gauging the Basis Risk of Catastrophe Bonds.

OLDWICK, N.J. -- A.M. Best Co. has released its methodology, Gauging the Basis Risk of Catastrophe Bonds, which describes the criteria for estimating the basis risk of catastrophe bonds and determining the amount of reinsurance credit that can be claimed by the sponsors of such bonds.

Hurricane Katrina and other recent catastrophic events have made investors more cautious about the type of triggers they will accept in catastrophe bonds. Investors have been shying away from indemnity catastrophe bonds and gravitating towards index-based parametric catastrophe bonds. (For the purposes of this press release, we consider non-indemnity catastrophe bonds as parametric catastrophe bonds).

A.M. Best believes that parametric catastrophe bonds come with "basis risk" that must be considered in the Financial Strength Ratings of the companies sponsoring the bond issues. Basis risk, in the context of catastrophe bonds, generally reflects the possibility that a catastrophe bond may not be partially or fully triggered (for covered perils) even when the sponsor of the catastrophe bond has suffered a loss.

The methodology outlines some of the factors that A.M. Best considers in estimating how much basis risk is inherent in parametric catastrophe bonds, and it also helps A.M. Best determine how much reinsurance credit will be given to the insurance/reinsurance companies that sponsor catastrophe bonds with parametric triggers. The methodology focuses on two distinct ways of measuring basis risk based on:

1) a scoring table that includes both quantitative and qualitative factors; and

2) the impact of the parametric catastrophe bond on the aggregate exceedance curve of the sponsoring company.

For more information on A.M. Best's Rating Methodologies or to download a copy of this full methodology report, visit

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at
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Publication:Business Wire
Date:Sep 25, 2006
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