S&P has published its “Insurer Risk-Based Capital Adequacy–Methodology And Assumptions,” which provides criteria for analysing the risk-based capital (RBC) adequacy of insurers and reinsurers.
The rating agency explained that the new criteria will improve its ability to differentiate risk and enhance the global consistency of its methodology, while also improving the transparency and usability of its methodology.
It supersedes 10 criteria articles that S&P previously used to assess an insurer’s capital adequacy.
The firm noted that the changes to total adjusted capital (TAC) relative to the previous criteria are, “Revising our calculation of TAC to reduce complexity and align with changes to our measure of an insurer’s RBC requirements, including removing various haircuts to liability adjustments (such as non-life reserve surpluses and allowing for up to 100% credit for life value-in-force).
“Not deducting non-life deferred acquisition costs. Updating our approach to non-life reserve discounting, and updating, simplifying, and clarifying the approach to unconsolidated insurance subsidiaries, noninsurance subsidiaries, associates, and other affiliates.”
The rating agency said it is also revising its methodology for including hybrid capital and debt-funded capital in TAC by, “Updating the principles for determining the eligibility of debt-funded capital in TAC.
“Aligning globally the hybrid capital and debt-funded capital tolerance limits; and introducing a new metric (adjusted common equity, or ACE) to be used in determining the amount of hybrid capital and debt-funded capital that is eligible for inclusion in TAC.”
Among other changes, S&P noted it is clarifying how it adjusts equity for life insurers when there is a mismatch between the balance-sheet valuation of assets and liabilities; updating its treatment of certain equity-like reserves to enhance global consistency; and using a narrower definition of policyholder capital that is eligible for inclusion in TAC.
S&P observed it will clarify its treatment of unrealized investment gains on participating business, and make enhancements to its criteria for assessing risks relating to ring-fenced participating business. It will also consolidate the separate criteria articles, as well as update the analytical principles, relating to property/casualty loss reserves and U.S. life insurance reserves.
