Insurance rating agency A.M. Best announced the publication of the updated Best’s Credit Rating Methodology (BCRM) on Friday, and also announced the names of several insurance and reinsurance groups that the rating agency has put under review.

Allstate and American Family are among the groups under review with positive implications, while the Amica Mutual Companies and the NYCM Companies were placed under review with negative implications.

The updated BCRM is a reorganization of the previous methodology, utilizing a building block approach to provide greater detail and clarity to the rating analysis. While the methodology has been updated, the core components of the analytical process—balance sheet strength, operating performance, business profile and enterprise risk management—remain the key pillars of the analysis and thus do not represent a fundamental change to the rating analysis, A.M. Best said in one of the statements published on Oct. 13. The beginning point is the balance sheet strength, according to A.M. Best Senior Director Stephen A. Irwin, who gave a brief overview of the changes in a video posted on the rating agency website. Moving on from that baseline, there can be positive, neutral or negative adjustments based on the operating performance, business profile and ERM assessments, with the BCRM publication setting some guidelines about how much notching up or down is allowed for each block.

The goal of the BCRM update is to further increase transparency in Best’s credit rating analysis, Best said in a statement that also listed some two dozen BCRM-related criteria procedures that were also published and immediately effective on Friday. In addition to reorganizing the methodology and criteria procedures to highlight the building block approach to the rating process, Best said other key refinements include the incorporation of the redesigned Best’s Capital Adequacy Ratio and the expansion of the discussion of available capital and equity credit.

Besides increasing transparency, another goal of the revising the methodology was incorporating more robust analytics, representatives of A.M. Best have said throughout the 18-month process. Best reiterated both goals on Friday in a Q&A-style briefing also published on Friday in an attempt to address questions about the impact of the updated BCRM and BCAR models.

Among the published criteria procedures relevant to property/casualty insurance company ratings were:

  • Understanding BCAR for U.S. Property/Casualty Insurers
  • Available Capital and Holding Company Analysis
  • Catastrophe Analysis in A.M. Best Ratings
  • Evaluating U.S. Surplus Notes
  • The Treatment of Terrorism Risk in the Rating Evaluation

Some of the revised criteria procedures are just amalgamations of previously in-use criteria procedures, Best said.

A.M. Best expects that less than 5 percent of its published ratings will be affected. Each rating potentially impacted by the updated BCRM will be subject to the full committee process under the revised criteria.

Completing the list of insurance groups put under review with positive implications, in addition to Allstate and American Family companies, Best listed:

  • California Casualty Compensation Insurance Company
  • Eastern Dentists Insurance Company (A Dental Society Risk Retention Group)
  • Great Plains Casualty

Besides Amica Mutual Companies and NYCM Companies, others P/C insurers put under review with negative implications were:

  • Andover Companies
  • Farm Bureau of Idaho Companies
  • Philadelphia Contributionship Companies
  • Mutual Assurance Society of Virginia
  • Otsego Mutual Fire Insurance Company
  • Specialty Risk of America
  • Triple-S Propiedad, Inc.
  • West Virginia Mutual Insurance Company

Reinsurance companies that Best put under review with positive implications include:

  • Hannover Re Companies
  • Munich Re Companies
  • Swiss Re Companies

A.M. Best will continue to assess all the companies listed under the updated BCRM, and will complete any corresponding rating updates in the near term. All ratings placed under review because of the updated BCRM will be resolved within a six months, Best said in its Q&A briefing.

Among the other questions addressed in the Q&A briefing document was one about whether any particular segments of the industry would face pressure as a result of the methodology update. While answering that there is no concern for any one segment, the briefing notes that the updated BCAR, with an enhanced focus on tail risk “may shine a brighter light on companies with outsized catastrophe exposures.” Best added that the rating agency “believes the new focus on tail risk and the more integrated view of enterprise risk management will bring to light the excellent risk techniques that some companies have already implemented.”

The document also addresses questions about the potential impact reinsurance demand, about whether any particular industry segment appear undercapitalized based on the BCAR revisions, about the role of ERM and notching rules related to ERM, and the role of cyber in the updated methodology. Best provided this link to the briefing:

A.M. Best published its first request for comment related to this revision process on March 10, 2016. Subsequently, A.M. Best published four additional requests for comment: Nov. 14, 2016; April 27, 2017; June 30, 2017; and July 26, 2017.

Friday’s publication concluded A.M. Best’s criteria refinement exercise. All criteria procedures are now available in the methodology section of A.M. Best’s website.

Source: A.M. Best