Concern that municipal bond insurers are too reliant on a small group of reinsurance companies is overblown, according to a new report from Duff & Phelps Credit Rating Co.

The report, set for release this week, calls "simplistic" the argument that too much business is concentrated with just two reinsurance companies -- Capital Reinsurance Co. and Enhance Reinsurance Co.

Other rating agency analysts and some market observers have said the industry's primary insurance companies cede too much of their exposure to the two companies and should also give business to firms that, unlike Capital Re and Enhance, work in insurance sectors other than financial guaranty.

The concern is that insurers would be dragged down if either or both reinsurers suffered a deterioration in credit quality. The analysts point out that, as of yearend 1992, 54% of the $474 million of premiums ceded by the primary companies went to Capital Re and Enhance.

But the Duff & Phelps report, "Facts About Financial Guaranty Insurance: Reinsurance, The Hidden Component," calls this measure "a simplistic view of the industry."

The rating agency says a more accurate assessment of exposure would acknowledge that insurers sign over only a small percentage of their exposure to reinsurers.

This "more comprehensive analysis," the Duff & Phelps report says, reveals that the two reinsurers have less than 9% of the industry's net exposure and only 10.2% of gross exposure.

"This is obviously not a concentration problem in the aggregate," Donald H. Paston, vice president at the rating agency, wrote in the report.

In addition, Paston noted that Enhance and Capital Re retain a little less than 11% of the industry's capital and about 10% of the industry's unearned premium reserves, further evidence that the industry's exposure to them is not dangerously high.

Duff & Phelps cited several advantages the monoline reinsurers have over multiline reinsurance concerns, including capital strength.

The most important advantage is that all of the monoline reinsurers' capital is dedicated to the financial guaranty business, the report says. By contrast, it says, financial guaranty activities usually represent only a small fraction of the multilines' total revenues, so problems in another sector could affect those reinsurers' claims-paying ability.

The monoline reinsurers' second major advantage is their "active approach to underwriting the book of business, including input into the underwriting process," the report says.

The rating agency also commended the monoline reinsurers' loss history, high-quality investment portfolios, and inherent commitment to the financial guaranty industry. The report says monoline reinsurers must meet the same rigid rating criteria as the primary companies, while multiline companies do not.

Duff & Phelps is a "strong proponent of risk diversification" and believes primary insurers should "utilize as many very strong, high-quality reinsurers committed to financial guaranty reinsurance as possible," the report says. But the agency prefers monoline insurers and does not see concentration risk as an issue at current levels, the report concludes.

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