S&P ‘Refining and Adapting’ Insurers ERM ‘Adequate’ Assessments

October 21, 2009

Standard & Poor’s Rating Services is refining and adapting its methodology for assessing insurance companies’ enterprise risk management (ERM), as set out in a recently published article, “Expanded Definition Of Adequate Classification In Enterprise Risk Management Scores.”

S&P said it published the article to help market participants better understand its “approach to scoring companies’ ERM processes. This article is related to our criteria article ‘Principles Of Corporate And Government Ratings,’ published on June 26, 2007, on RatingsDirect.”

S&P”s update of it criteria is designed to “expand and subdivide the definition of Adequate as we use it to score a company’s ERM capabilities. These criteria will give market participants the ability to differentiate among the large preponderance of companies whose ERM scores are in the Adequate category. We have also supplemented our definition of Excellent ERM.”

The new article supersedes the ERM classifications in “Summary Of Standard & Poor’s Enterprise Risk Management Evaluation Process For Insurers,” published on Nov. 26, 2007, on RatingsDirect.” S&P added that it doesn’t expect any effect on existing ratings as a result of these criteria, which are effective immediately.

S&P explained that, “given the number of companies whose ERM scores fall into the Adequate category,” it believes additional differentiation of these companies’ ERM capabilities “can be provided based on the scope and progress of their ERM processes.

It has separated the definitions in the “Adequate” category into three levels, as follows: “Adequate, Adequate With Strong Risk Controls, and Adequate With Positive Trend. A company whose ERM is scored Adequate With Strong Risk Controls should have all of the characteristics of Adequate, plus strong controls over all of its material risks. A company whose ERM is scored Adequate With Positive Trend will have all of the characteristics of Adequate With Strong Risk Controls plus risk management culture and strategic risk management scores of at least Strong with the possibility to attain an ERM assessment of Strong within 24 months.”

These criteria represent the “specific application of fundamental principles that define credit risk and ratings opinions,” S&P continued. Their use is determined by issuer- or issue-specific attributes as well as the rating agency’s “assessment of the credit and, if applicable, structural risks for a given issuer or issue rating. Methodology and assumptions may change from time to time as a result of market and economic conditions, issuer- or issue-specific factors, or new empirical evidence that would affect our credit judgment.”

The reports are available to RatingsDirect subscribers at: www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to: research_request@standardandpoors.com. Ratings information can also be found on S&P’s public Web site at www.standardandpoors.com.

Source: Standard & Poor’s

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