Newsletter – February 2018

A.M. Best Updates Its Rating Methodologies and Capital Model

Marc Liebowitz, CFO Consulting Partner LLC

A.M. Best (AMB) recently revised its rating methodologies, most of the changes relate to updated procedures and the underlying analytical components have generally remained in place. The below videos provide an overview of the methodology updates:
“A.M. Best’s Mosher: Methodology Update, Benchmarks Are Released”
“Market Issues, Methodology Updates Dominate A.M. Best’s NY Briefing”

As part of its revised rating methodology, AMB released its revised capital model, Best Capital Adequacy Ratio (BCAR). While the components and the equations to determine a group’s BCAR ratio have remained largely in place, the revised model applies updated technologies to better determine balance sheet risk. These technologies allow the model to quantify risk across various loss severity scenarios. Below are links that detail the updated processes:
“Understanding BCAR for U.S. Property/Casualty Insurers”
“Understanding BCAR for U.S. and Canadian Life/Health Insurers”

A.M. Best has termed its revised rating procedure the “building block approach.” The first step, or building block, is the capital assessment. Subsequent analytical steps either add or detract from the score assigned during the capital strength assessment. We discussed these steps in our previous articles on the ratings process. See our “Insurance Company Credit Rating Advisory Practice” Part 1 and Part 2

Balance sheet strength remains the foundation of the rating process, Best’s methodology will continue to review current capitalization and forecast future balance sheet strength. Operating performance, business profile and enterprise risk management are key elements which help to determine a groups prospective capital position. View A.M. Best’s Credit Rating Methodology

Benchmarks and peer group analysis remain an important factor in the determination of a group’s rating. Insurance companies which consistently outperform peer and/or industry benchmarks in terms of operating results and business profile are more likely to achieve higher rating categories. Peers are those that generally offer similar products, have approximate premium volume, operate in similar territories or otherwise compete in each other’s respective markets. Given the importance of benchmarks, companies should understand how they are developed and applied over the rating process.

AM Best expects the updates to the capital model and rating processes to support a more detailed rating analysis and lead to greater transparency relative to the assigned rating.

CFO Consulting Partners can guide companies through AMB’s revised rating processes and updated capital model. We can provide an understanding of the drivers of your current rating and develop strategies targeted at achieving your desired rating.