S&P finalises new insurer rating criteria
S&P has released its final new insurance rating criteria, after a near two-year development phase in which it ultimately walked back from many proposed changes.
However, the new criteria retain a stricter approach to account for hybrid and debt-funding capital, and S&P estimates that the changes could lead to actions for about 10% of its insurance ratings.
"We estimate the majority of rating changes would be by one notch, with more upgrades than downgrades,” it said.
The 10% impact is in line with analysis from Litmus earlier this year.
Its capital and earnings assessments would be more materially impacted, with changes for this factor for up to 30% of insurers.
Some insurers might see improved capital adequacy scores, primarily due to capturing diversification benefits more explicitly and the removal of various haircuts to liability adjustments and not deducting non-life deferred acquisition costs.
On the other hand, some insurers could face declines in capital adequacy because of factors including changes to the methodology for including hybrid capital and debt-funded capital, as well as the recalibration of our capital charges to higher confidence levels.
As previously signalled, S&P’s new approach to nat-cat charges means it may consider tests up to a one-in-500-year level, versus the flat one-in-250-year approach previously.
S&P has also revised its approach on nat-cat charges and will now use a one-in-200-year, one-in-250-year, one-in-333-year or one-in-500-year stress test to analyse peak risk scenarios.
The new cat test framework will “make better use of available data, provides more stability and transparency in the actual risk charge, and does not add significantly to the complexity or operational challenges of the criteria”, its proposals outline. “We also believe this approach will more accurately reflect insurers' risk profiles.”
The final proposal also removed a requirement that senior debt and hybrid instruments issued by non-operating holding companies be downstreamed to operating entities in order to allow for their inclusion in capital calculations. S&P will now assume that holding company resources are available to fund operating entities.
However, it has introduced a new 20% haircut on resources held at holding company level if there is “high structural subordination”. It said this haircut captured the uncertainty over whether holding company level assets could be deployed for other uses, versus being made available to support an operating company under stress.
Feedback given to S&P on this point suggested that the haircut would reduce capital efficiency and increase the cost of doing business.
Bermuda carriers had also critiqued part of the proposed treatment of debt.
Early on in the process, S&P had dropped plans to rework how it mapped ratings from other credit agencies after these were criticised as potentially anti-competitive.