Standard & Poor’s Ratings Services is asking for reactions to proposed changes in the way it evaluates insurers’ and reinsurers’ economic capital models.
S&P, New York, talks in the proposal about the conditions for deciding how credible an insurer’s economic capital model is, according to a summary of the proposal released by the agency’s Paris office.
Analyzing an insurer’s economic capital model is part of the process of analyzing its enterprise risk management program, S&P says.
S&P conducts ERM level I and level II reviews, the agency says.
“For insurers exhibiting complex risks and who have credible ECMs and a demonstrated ERM culture, we believe ECM reviews could yield information useful for our analysis,” the agency says. “We term this analysis the ‘ERM level III’ review.”
When conducting an ERM level III, S&P would analyze one “set of modules,” which relates to “‘indistinct’ risks, 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,” S&P says.
“The second set of modules analyzes the insurer’s modeling of exposure to ‘distinct’ financial and nonfinancial risk groups like market risk, credit risk, operational risk, and insurance risk.”
S&P plans to assign a score of basic, good or superior to an insurer’s approach to 5 categories within each risk. The categories are methodology, data quality, assumptions and parameterization, process and execution, and testing and validation, S&P says.
“We do not expect significant rating changes if the proposed criteria were to be adopted,” S&P says. “We note that existing ERM scores will not be affected until we have completed our ERM level III evaluations.”
Comments on the proposal are due July 19.