In May, Standard & Poor’s confirmed that it had finalized a 10-month “Request for Comment” (RfC) process around proposed changes to the rating agency’s criteria for rating insurers and reinsurers. By late July, when this article was written, more than 90 percent of the 2,000 plus insurance (and reinsurance) ratings published by S&P had been updated, with the remainder due by the end of the month.

Executive Summary

"It's not easy to be wholly transparent and consistent when conducting 'prospective' analysis" of insurance companies, writes Stuart Shipperlee, a former insurance ratings analyst, who assesses S&P's attempt to do all three things at once with its new insurance ratings criteria. Going through details of recently published ratings reports for three reinsurers, Shipperlee notes that transparency has improved, with new levels of disclosure revealing the central role of S&P's ERM and "management and governance" assessments in individual rating decisions. He also finds some inconsistency between S&P's explanations of how it will determine a "competitive position" score—a key determinant of the base rating or anchor—and actual outcomes.

Some 10 percent of ratings have changed as a result, with slightly more upgrades than downgrades.

The stated goals of the criteria change have been to increase transparency, enhance consistency and make the ratings more prospective. This is a difficult circle to square. It’s not easy to be wholly transparent and consistent when conducting “prospective” analysis.

Moreover, the RfC feedback led S&P to make its initially proposed changes less prescriptive and mechanistic and more judgmental. At Litmus, we fully agree, but inevitably that reduces “transparency” in the sense of the rated insurer or rating user being able to exactly define what leads S&P to its conclusions.

That said, the new criteria are both clear and detailed in how the series of rating factors and subfactors combine to lead to a given final rating outcome. The disclosure of this in any given case is significant, although not total.

Analytically, the most material development seems to us to be the profound impact that operating performance (and the things that are perceived to drive it) now has on an insurer’s or reinsurer’s rating—both in terms of prospective performance and in terms of the insurer’s track record (not least versus its peers). For reinsurers in particular, the new levels of disclosure also highlight the central role played by the analysis of ERM (enterprise risk management), specifically, as well as overall “management and governance” in individual rating decisions.

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