Efforts to advance a more principles-based system for ensuring proper reserves and capital are occurring both on the regulatory and rating agency fronts.
During a discussion of its new PRISM capital model, Fitch Rating analysts detailed how it would fine-tune assessing capital adequacy.
PRISM is being introduced in the United States now and will be introduced in Europe during the summer, according to Keith Buckley, group managing director in Fitch’s Chicago office. It is being used to assess capital adequacy for both life insurers and property-casualty insurers. The model was initially introduced in June 2006.
The new capital model will not replace Fitch’s examination of companies’ internal capital models but rather will complement that examination and create a benchmark for comparison among companies, he explained during a conference call on April 25 to formally announce PRISM.
The new model goes beyond generating ratios and also creates a “probabilistic loss distribution of required capital,” according to Buckley.
The life insurance industry as measured by PRISM has excess capital of $45 billion above the PRISM “AAA”-rating threshold, added Doug Meyer, managing director and head of U.S. life ratings in Fitch’s Chicago office. This compares with actual industry statutory capital of $249 billion at year-end 2005, according to Fitch.
A Fitch report on PRISM noted that “capital requirements for many variable annuity products are higher under PRISM than in most factor-based models, as well as under the stochastic approach used in the NAIC RBC ratio under C-3 Phase II (which includes a slow phase-in).” Fitch added that it believes PRISM “more appropriately measures the embedded guarantees of these products, while giving credit for reinsurance and hedging activities.”
A significant portion of this capital sits with mutual insurers, Meyer said. This finding reflects that stock companies often dividend up to their parent, which in turn uses those funds for such purposes as paying shareholder dividends and servicing debt, he said.
The capital level was helped by a benign credit environment and strong equity market performance, Meyer continued.