One certain outcrop of the financial crisis was a wholesale reassessment of enterprise risk management on the part of insurers, ratings agencies and regulators.
A new report from Aon Benfield, “Evolving Criteria: Keeping Pace with Rating Agency, ERM and Regulatory Developments,” takes measure of the state of risk assessment.
While the regulatory retake on ERM--most notable in the Solvency II regulations pending in the European Union--is forthcoming, rating agencies have already taken action. The report details how Standard & Poor’s, Moody’s, Fitch Ratings, and A.M. Best have updated their rating criteria in the past year.
The report takes a historic view of ratings actions and finds, not surprisingly, a strong correlation between a company’s rating and its underlying financial health. “It is clear that rating activity has been driven by operating performance as companies that were downgraded significantly underperformed their peers,” the report states. “The downgraded peer group reported five-year average combined ratios that were on average 12 points higher than companies who had no ratings movement, and 17 points higher than the upgraded peer group.”
Yet, how a company comes by its good financial numbers is under increased scrutiny. A company with a healthy combined ratio but an inadequate capital adequacy ratio is more likely to be downgraded.
“Downgraded companies were also much more highly levered than the other peer groups. Capital adequacy remains important as evidenced by overall lower BCAR scores for the downgraded peer group,” the report states.
What’s more, claim management, and especially pricing and underwriting functions will matter to rating agencies. “Underwriting profitability is paramount to achieving an upgrade and avoiding a downgrade, and for companies currently on a downgrade trend this is even more important as it takes many years to regain an original rating, and many companies continue to get downgraded after the initial rating change.”
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