Insurers will now be considered under a revised set of guidelines when it comes to their ratings.
Moody's new guidelines are based on its previous methodological, which assessed the credit risk of insurers throughout the recent financial crisis, but now includes refinements based on the experience of the past three years. The rating agency doesn't expect these revised methodologies to affect insurers' current ratings.
"The updated global insurance methodologies highlight the key factors that drive our ratings of insurers around the world, maintaining the same framework to assess the insurers' business and financial profiles," says Ted Collins, Moody's group managing director, but adds that they include certain refinements that are intended to more accurately reflect insurers' creditworthiness going forward.
"As before, the purpose of the published methodologies is to provide consistency and transparency to Moody's rating process, by identifying and discussing the key factors that explain our insurance financial strength ratings globally," he continues.
Compared to previous methodologies, Moody's notes the following changes:
• The inclusion of the insurer's operating environment with specific accompanying metrics
• The removal, addition and changes to a number of metrics used to analyze the key rating factors of market position, asset quality, capital adequacy, profitability, liquidity and financial flexibility
• Expanded rating ranges for rating categories below “Ba” in the metrics used to analyze key rating factors
Because both life and P&C methodologies apply globally, Moody's admits they are general in some respects, and not intended to be an exhaustive discussion of all factors that its analysts consider in each insurer's rating. Regulatory, accounting and product characteristics vary widely from country to country, so Moody's rating considerations take account of such differences.
Additionally, Moody's notes one other significant change—the explicit recognition of an insurer's local operating environment, which, when coupled with the company's fundamental business and financial credit profile, helps to better explain the agency's insurance ratings in developing markets.
In total, Moody's has assigned insurance financial strength (IFS) ratings to 575 insurance companies worldwide. It says its long-term IFS ratings are its opinions of the ability of insurance companies to pay punctually senior unsecured policyholder claims and obligations. Of the rated insurers, 416 (72%) are domiciled in North America, 81 (14%) in Europe, 29 (5%) in Asia Pacific, and 49 (9%) in Other regions (e.g. Latin America).
Concurrently, fellow rating agency
S&P says it views an insurer's ECM as an important means of evaluating the insurer's risks within a strong ERM program, which it believes are fundamental to an insurer's management and decision-making processes.
When analyzing insurers, S&P says it conducts ERM level I or level II reviews, according to the range and complexity of the risks an insurer exhibits and how extensive S&P perceives the insurer's ERM programs to be. However, for insurers exhibiting complex risks and that have credible ECMs and a demonstrated ERM culture, S&P believes ECM reviews could yield useful information. We term this analysis the "ERM level III" review.
S&P structured its proposed criteria around two sets of modules:
• The first set analyzes "indistinct" risks, such as the approaches an insurer uses to model total targeted resources, to value liabilities and assets, to model potential exposures to indirect risks such as pension fund risk and to model the effect of management decisions, diversification and capital fungibility.
• The second set of modules analyzes the insurer's modeling of exposure to "distinct" financial and non-financial risk groups like market risk, credit risk, operational risk and insurance risk. Within each of the risks, S&P articulates the criteria around five categories to be reviewed, including: methodology, data quality, assumptions and parameterization, process and execution, and testing and validation. It then assigns a score of "basic," "good" or "superior" to an insurer's approach for each category.
At the conclusion of the ERM level III review, S&P combines the scores assigned to each category within each risk to form an overall credibility assessment of an insurer's ECM.
S&P doesn't expect any significant rating changes if the proposed criteria were to be adopted, and says that existing ERM scores will not be affected until it has completed the ERM level III evaluations.
S&P's proposals and the specific requests are outlined in "A New Level Of Enterprise Risk Management Analysis: Methodology For Assessing Insurers' Economic Capital Models," which can be found on its website.
