February 8th, 2016

Rating Agency Developments, Part II; Europe and Asia Pacific

Posted at 1:00 AM ET

Europe

In anticipation of the January 2016 rollout, the European insurance industry focused squarely on Solvency II. Rating agencies refrained from instituting any new criteria.

It is expected that A.M. Best will deploy the stochastic Best’s Capital Adequacy Ratio (BCAR) analysis one year after its U.S. release (target Europe 2017). Standard & Poor’s (S&P) has not announced any new criteria since the 2013 revision of global criteria, which left the capital model untouched but improved the transparency and consistency of much of the rest of the ratings assessment. In July of 2015, Fitch recalibrated its notching criteria for the insurance sector, which led to multiple reinsurer upgrades.

Asia Pacific

In Asia Pacific, as elsewhere in the world, A.M. Best continues to place an increased level of emphasis on enterprise risk management (ERM) program development.

Catastrophe risk, particularly for non-vendor modeled perils, remains an important component of companies’ risk management review and the capital adequacy analysis as many Asian countries face multiple catastrophe perils including flood, typhoon, earthquake, volcano and terrorism.

In less developed economies, counterparty credit risk can also impact capital adequacy ratios. For example, recent reinsurance cession requirements in Indonesia have created a difficult situation. The regulatory body encourages companies to obtain ratings from global rating agencies while requiring insurers to cede a larger amount to domestic reinsurers that do not have a rating. These cedents then face higher credit risk charges which result in pressure on ratings.

Companies seeking an S&P Financial Strength rating in less developed economies often find their rating limited by the sovereign rating of the country of domicile, regardless of stand-alone financial strength. This limitation as a function of rating criteria has contributed to S&P’s shrinking market share in the region.

Fitch and Moody’s have similar sovereign rating “ceilings” built into their criteria, but each have invested heavily in the region to grow ratings coverage. Moody’s appear to have recently captured a leading market share in insurance financial strength ratings in China.

Link to Part I>>

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