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Rating Agency: PBR To Affect Few Credit Ratings

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A shift to a new, principles-based reserving approach should not affect many life insurers’ ratings, according to Moody’s Investor Service.

But adoption of a PBR system could hurt the ratings of insurers that spend excess capital on activities that do not enhance earnings capacity, according to Wallace Enman, a senior accounting analyst at Moody’s New York.

Advocates of a PBR system want regulators, insurers and others to move toward relying on basic financial principles, actuarial judgment and statistical modeling methods, and away from the traditional reliance on detailed reserving rules and static reserving formulas.

A PBR system could make the risks an insurer assumes more clear and lead to a worldwide “evolution of risk quantification,” Moody’s analysts write in the new PBR report.

Moody’s says it plans to build a PBR analysis into its own rating process.

Moody’s says it also plans to supplement “principles-based approach” results with its own analysis of “deterministic scenarios,” or anticipated performance under specific sets of conditions.

When analyzing a company with deterministic scenarios, Moody’s would look at how the company might perform in the specified scenario, or scenarios, on a contract-by-contract basis.

Because subjective assumptions would influence reserves and capital, Moody’s analysts may need to review the assumptions for products that are especially sensitive to a change in assumptions, or are especially important to an insurer’s performance, Moody’s says.