Birgitte Arendal, Senior Vice President and Matthew Day, Senior Vice President
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Standard & Poor’s (S&P) proposed insurance rating criteria framework includes significant changes that may adversely impact financial strength ratings of (re)insurers. The new framework is expected to be published and become effective in early 2013. Guy Carpenter has examined the three key proposed criteria changes. In our opinion, these can drive rating changes especially for (re)insurers in the United States and other developed countries with “A” and “AA” range financial strength ratings.

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Matthew Day, Senior Vice President
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The Market ratings remain the principal measure of financial strength to be applied to operations underwriting at Lloyd’s, but several rating agencies separately provide syndicate-specific analysis. These analyses can support the reinsurance-buying decision-making process, but it is dangerous to rely on them without understanding the varying underlying methodologies. (None of these products are endorsed by Lloyd’s.)

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Matthew Day, Senior Vice President
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The financial strength ratings assigned to Lloyd’s by S&P, A.M. Best and Fitch have been relatively stable in the 15 years since the first rating was assigned. During this period, the (re)insurance industry and Lloyd’s itself have undergone dramatic change as they responded to the major challenges of the September 11, 2001, terrorist attacks, devastating US and Gulf of Mexico hurricanes and other natural catastrophes that occurred across the globe. The softening casualty insurance market and the global financial crisis also caused difficulties during this time. The current Lloyd’s ratings assigned by each rating agency are at their original levels - a significant achievement given that most of Lloyd’s peers have failed to recover their pre-2001 ratings.

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On July 9, 2012, Standard & Poor’s (S&P) issued a Request for Comment on proposed changes to its criteria for rating insurance companies globally. Although S&P expects the overall impact on global ratings to be modest, the proposed changes are significant and may adversely affect individual rated (re)insurers. The new criteria are expected to be published in late 2012 or early 2013.

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Portfolio Management

Guy Carpenter offers multiple tools for clients that are looking to implement portfolio management and enterprise risk management (ERM) strategies. Our tools focus on both natural and man-made catastrophes, and we work with clients to tailor the right short-term and long-term solutions.

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BCAR Impact

Purchasing an aggregate stop loss provides a positive impact to the BCAR score by decreasing the capital charge. In year one, the benefit of the purchase is applied to the premium risk charge for the current accident year with benefit to the reserve risk charge in future years. In the first year, the accident year stop loss may reduce the premium risk charge significantly. The biggest reduction in the premium risk charge will occur when the stop loss provides protection between A.M. Best’s estimate of the expected loss ratio and 35 percent to 45 percent above that estimate. The decrease in the capital factor is equal to the limit purchased net of the AP that must be paid in the event of a loss. Surplus is reduced by the after-tax margin paid. For the second year, the reduction in capital charge is applied against the loss reserves. This reduces the benefit in the second year from that achieved in the first year, as the reserves are net of loss payments made in year one.

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Capital Requirements and the Costs of Compliance are Discriminately Higher for Smaller Reinsurers and Will Force Some Consolidation

Large, diversified and highly-rated reinsurance groups with approved internal capital models will likely have materially lower capital requirements under Solvency II than they already maintain for their ratings. For these reinsurers, rating agencies will remain the final arbiters of capital requirements, while Solvency II will add administrative and regulatory cost and, perversely, encourage a lower standard of solvency. So far, rating agencies have resisted the demand to materially reduce capital requirements, with S&P granting only a limited weight to internal economic capital models in their assessment of risk adjusted capitalization (1).

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WRIN.tv interviews Chris Klein, Head of Guy Carpenter’s Sales Operations for the United Kingdom and EMEA regions and Market Relationships, in London, regarding the global and sovereign economic crisis, risk modeling, rating agencies, regulators, and reserving practices.

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Standard & Poor’s has downgraded the U.S. sovereign debt rating to AA+ from AAA. Implications for (re)insurers worldwide are mixed. Although there are broad economic implications, markets appear to have anticipated at least some of these, which could forestall rash or catastrophic outcomes. The long-term effects, however, could be profound.

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During a recent webinar, a panel convened by A.M. Best reviewed catastrophe models and addressed questions that arose as a result of the new RMS and AIR model versions that have been released. The discussion was focused on how A.M. Best wants companies to demonstrate a solid understanding of their catastrophe risk exposure and where it fits within their risk tolerances. The panel outlined the need for rated companies to engage in ongoing discussions with their A.M Best analysts regarding the efficacy of model output, specifically, the companies’ confidence in the model output and the reasoning behind this view.

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