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NEW YORK-Standard & Poor's Corp. is refining its insurance company rating procedures with new tests to measure insurers' exposure to catastrophe losses.

Under the new method, S&P will estimate an insurer's gross exposure to a hypothetical $20 billion in industry cat losses. The rating agency then will calculate the insurer's net exposure after factoring in reinsurance recoveries and other alternative risk financing tools, such as bank lines of credit or capital markets products.

An insurer's ability to withstand cat losses then will be measured using three ratios:

A catastrophe exposure ratio comparing net cat exposure with consolidated statutory surplus. An insurer with a AAA claims-paying ability rating, for example, should have a net cat exposure less than 15% of surplus, while a company rated AA should have an exposure between 10% and 35% of surplus, according to S&P.

A catastrophe recovery ratio comparing net catastrophe exposure to average pre-tax income over three years.

A catastrophe liquidity ratio comparing net cat exposure to liquid assets.

The first ratio is the best overall measure of an insurer's exposure, while the latter two focus on its ability to pay cat losses, S&P says.

S&P has set benchmark ranges for each ratio in each of its rating categories; insurers whose ratios are outside the benchmark ranges and who are not taking "appropriate" steps to address the exposure could be subject to downgrades. Because many insurers have taken such steps in recent years, though, S&P expects most companies will fall within the benchmark ranges.

The 20 largest property/casualty companies showed a wide range of gross exposures, according to S&P. Allstate Insurance Group, with $9.4 billion in year-end 1995 surplus, for example, had a gross cat exposure of $3 billion; by contrast, Berkshire Hathaway Group, with $19.4 billion in 1995 surplus, had a gross cat exposure of $84 million.

S&P will use the new catastrophe tests for both claims-paying ability ratings and-with some modifications-for qualified solvency ratings, according to Managing Director Alan Levin.