S&P Publishes Updated Insurers’ Economic Capital Models

January 26, 2011

Standard & Poor’s Ratings Services has published its updated methodology for assessing insurers’ economic capital models on Jan. 24, 2011.

S&P said the announced criteria “apply to all the life and health insurers, property and casualty insurers (frequently called non-life insurers), and reinsurers, which it rates.

Full details of the criteria, which are effective immediately, are available in the article “A New Level Of Enterprise Risk Management Analysis: Methodology For Assessing Insurers’ Economic Capital Models,” published Jan. 24, 2011. This follows our “request for comment,” published May 19, 2010.

“We are refining our methodology for analyzing insurance companies’ economic capital models,” explained said credit analyst Laura Santori. “As a starting point, the criteria address our approach for assessing the ‘credibility’ of an insurer’s ECM. Our criteria describe those parts of an insurer’s ECM we typically analyze in an ERM (enterprise risk management) Level III review.”

The criteria are structured around two sets of modules:
• The analysis of modeling considerations, such as the approaches an insurer uses to model total targeted resources, to value liabilities and assets, to model potential exposures to indirect risks such as pension fund risk, and to model the effect of management decisions, diversification, and capital fungibility; and
• The analysis of the insurer’s modeling of exposure to “distinct” financial and nonfinancial risk groups, like market risk, credit risk, insurance risk, and operational risk.
Within each of the risks, we have articulated the criteria around five categories that we review: methodology, data quality, assumptions and parameterization, process and execution, and testing and validation. We assign a score of “basic,” “good” or “superior” to an insurer’s approach for each category. The article provides the criteria we use, under each of the five categories, to assess an insurer’s modeling framework and, where appropriate, includes examples of how we evaluate insurers’ approaches.

S&P said its overall assessment for an insurer’s ECM combines the scores of the risk modules according to the relative importance of each risk to the insurer’s overall risk profile. The results of our ERM Level III reviews feed into our assessment of an insurer’s ERM, capitalization, and management and corporate strategy, within our framework for rating insurers.”

The report is available to RatingsDirect subscribers on the Global Credit Portal at www.globalcreditportal.com and RatingsDirect subscribers at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to research_request@standardandpoors.com. Ratings information can also be found on Standard & Poor’s public Web site by using the Ratings search box located in the left column at www.standardandpoors.com. Alternatively, call one of the following Standard & Poor’s numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4011.

Source: Standard & Poor’s

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