A new report by Litmus Analysis notes that the ratings of up to 10% of insurers and reinsurers rated by S&P Global could be affected by new proposed changes to the rating agency’s capital model.
Analysts warn that “winners and losers are inevitable” from the changes proposed by S&P earlier this week.
They include a technical but fundamental shift in how S&P credits diversification within its model, which means that it will become much more predicated on the specific details of an insurer’s underwriting portfolio.
Other crucial changes include various aspects of the treatment of catastrophe exposures and of the use of debt capital.
Importantly, these may include additional capital charges related to items such as catastrophe exposure, all of which could mean companies need to buy more reinsurance protection as well, as this could help to mitigate additional capital charges.
Given the scale and range of the proposed changes, and the potential number of consequential rating actions, Litmus is suggesting that insurers and reinsurers rapidly assess the exact role the capital model outcome is currently playing in their S&P rating.
“The best prepared and engaged insurers and reinsurers will have the best opportunity to manage this as well as possible,” said Stuart Shipperlee, Managing Director at Litmus Analysis.
“The devil will be in the detail of both how the model changes for any given rated group, or stand-alone rated carrier, impacts their model outcome and, crucially, how the rest of their credit profile – as per the wider S&P rating methodology – interacts with the model outcome.”
Litmus analysts also advise that rated carriers should consider their profile in the context of the thematic changes proposed, including the degree and nature of their diversification within and across both their product lines and investment portfolios.
“Rated carriers have until February 18 to provide feedback but with so much nuance to this, and so many carriers potentially affected, we believe the process around deciding what feedback is given needs to start now. It will only be a matter of months before all those insurers and reinsurers whose ratings may be impacted (positively or negatively) will be publicly identified,” Shipperlee continued.
“That will occur at the point of the new model release – with reviews of that then being executed by the agency in the following months,” he explained.
“As such, we encourage insurers to make sure they understand the exact role the capital model outcome is currently playing in their S&P rating in the context of all the other elements of S&P’s rating assessment methodology.
“They need to consider how much of a model change would be needed to impact their rating and the extent to which other parts of the S&P methodology could be discussed with the agency to help offset any material negative model change.”
“They should also consider their profile from the point of view of the thematic changes proposed, such as degree of product line and investment risk diversification, or whether their AEL PML position may increase in significance.”
“And, finally, if their operating equity is a function of debt issuance higher in the organisation chart that may no longer be credited, they should begin to consider alternatives. And that’s not just about other sources of equity capital or things S&P will see as equivalent – risk mitigation and changes to risk appetite may be other things to consider.”
Litmus notes that S&P has not published a pro-forma version of the new model. There will not be a new model available until the new model criteria is formally adopted and published.
Thus, the firm suggests feedback needs to focus on the technical details of the proposals, the extent to which those changes may not fully reflect the carrier’s strengths and how the agency might address that going forward.
