A.M. Best may require less capital for some insurance companies to support catastrophe exposure after it modifies its catastrophe stress test.

The modifications come as a result of recent enhancements to catastrophe management tools available to the insurance industry. Companies that demonstrate a strong understanding of their catastrophe exposure, sound catastrophe risk management and the financial flexibility to replace a significant amount of lost capital after an event will be afforded additional leeway in the catastrophe stress test, Best said.

It established the level of capital requirements within the catastrophe stress test by considering expectations relating to data quality, overall catastrophe management, the historical accuracy of the catastrophe model output and the potential for enhancements to the catastrophe models.

Over the past few months, many reinsurers and insurers have incorporated considerable changes to the catastrophe models they use, which will likely improve the accuracy and increase the conservatism within the catastrophe models beyond the level anticipated by A.M. Best when the catastrophe stress test was implemented," Best said.

While Best may give consideration to insurers that demonstrate stronger catastrophe management and financial flexibility, companies that continue to utilise less conservative modelling tools or are perceived to have weak catastrophe management or have limited financial flexibility will continue to have more stringent capital requirements.

The ratings agency urged companies to manage their catastrophe exposure, not the rating analysis after hearing anecdotal tales of insurers "model shopping" to find the catastrophe model with the lowest indication, as well as other ways to manage the rating analysis.

"There are several commercial catastrophe models and many private models that are used within the insurance industry. The model or models a company chooses to use should be based on the best interest of the company in understanding their catastrophe risk," Best said.

It will also consider the quality of data captured, model differences and management's ultimate decisions in their management of catastrophe exposure.

"Overall catastrophe management through underwriting, loss mitigation, exposure management and reinsurance or retrocessional reinsurance is critical to any company with significant catastrophe exposure within its operating market. A.M. Best's confidence in a company's enterprise risk management and specifically catastrophe exposure management, along with a company's ability to replenish any lost capital following a catastrophe play a major role in the final view of a company's capital needs and A.M. Best's willingness to reduce its stressed capital requirements," Best said.