S&P Global has released its final version of revised insurance rating criteria and capital model, impacting 30% of companies, with only 10% expected to undergo rating changes, according to Gallagher Re Insights.
Published on November 20, 2023, the criteria aims to distinguish companies with stronger capitalisation and enhance consistency in their application.
One notable alteration involves the inclusion of Non-life Deferred Acquisition Costs (DAC) in capital calculations, offering a more nuanced assessment of companies’ financial strength.
Additionally, the adjustment in the discount rate for Property and Casualty (IP&C) reserves, now based on the yield rate of the government bond closest to the reserve duration, aims to provide a more accurate reflection of economic value.
S&P also fine-tuned the calculation for debt and hybrid capital tolerance, fostering greater consistency between regions and potentially influencing future capital management strategies.
A crucial clarification pertains to the treatment of senior debt, particularly benefiting Bermudian companies, which can now retain capital at the holding company with a 20% haircut while maintaining capital credit for senior debt.
Furthermore, S&P explicitly considers risk diversification benefits for lines of business, updating correlation assumptions.
However, companies face heightened challenges with increased capital charges across various risks, particularly impacting longer-tailed reserve lines, where charges may double or triple.
Moreover, the adjustment in natural catastrophe stress levels to 1-in-333-year and 1-in-500-year return periods at AA and AAA levels, respectively, reflects a meticulous reassessment of risk dynamics.
S&P has listed 64 companies for a rating review, expecting significant changes in their capital score, leading to potential adjustments in Financial Strength Ratings (FSR) or Issuer Credit Ratings (ICR). The review for these firms is slated for completion by February 2024.
Bermudian-based (re)insurers and certain US life insurers’ holding companies have been placed under CreditWatch Negative, reflecting a potential change in ICR. This move, driven by reassessment and feedback during the Request for Comment (RFC) process, could impact future debt and hybrid capital costs.
Insurers negatively affected by the new criteria are advised to explore reinsurance options for capital relief, such as Adverse Development Covers (ADCs), Loss Portfolio Transfers (LPTs), or additional tail cover. Engagement with representatives for strategic planning and capital management is encouraged.
The revisions mark the conclusion of a two-year process involving RFCs and aim to provide insurers and reinsurers with greater clarity and consistency in S&P’s rating criteria and capital model.
