March 10, 2016 by Canadian Underwriter
A.M. Best Company on Thursday published proposed revisions to its core credit rating methodology, Best’s Credit Rating Methodology (BCRM).
At the same time, the ratings firm has released proposed revisions for the criteria procedure for the United States property and casualty (P&C) Best’s Capital Adequacy Ratio (BCAR). A.M. Best is requesting comments from all interested parties on these draft documents, which are currently available in the methodology section of A.M. Best’s website.
Later this year, A.M. Best will release proposed revisions to criteria procedures for the BCAR models covering U.S. life/health, Canadian, title and all other non-U.S. insurers, the ratings firm reported. At that time, a second comment period for the BCRM will occur.
Written comments for the current process should be submitted by email to firstname.lastname@example.org no later than June 30. A.M. Best said in a statement that the details of any comments received may be made public, unless specifically requested to be kept confidential.
Implementation of the new credit rating methodology and BCAR models is expected in the first quarter of 2017.
This new release of the BCRM is a “reorganization of the current methodology, providing a road map with greater detail, clarity and transparency to the rating analysis,” A.M. Best said in the statement. “The BCRM offers a forum for discussion with analytical staff and also will promote greater consistency in the rating process. While the methodology is being updated, the core components of the analytical process – a review of 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.”
The proposed BCAR criteria procedure update applies to U.S. P&C companies. All companies that are evaluated using the BCAR model will receive their new BCAR output based on 2014 data, A.M. Best explained in the statement.
Matthew Mosher, executive vice president and chief operating officer of A.M. Best Rating Services Inc., said in a video discussion of the revisions that “over time, we’ve seen better technology, better information and we’ve been able to build a better capital model. That’s one of the things that started a lot of this.”
Mosher said the firm has built a “better capital model that’s more robust and more consistent in terms of the risk measures. With that, the output shows up in five different confidence intervals. It’s different from our old capital model, which looked at capital on one risk level. This works through and builds a more consistent, clear approach to the rating process and displays to companies how this capital model fits in.”
Because of the five different confidence intervals, Mosher said, things are looked at from a 95%, 99%, 99.5%, 99.8% and 99.9% probability of default. Before, the firm only looked at a 99% probability of default.
“We’re going pretty far out into the tail,” Mosher continued. “Those companies that have tail exposure, it typically shows up with catastrophe writers in terms of the exposures that they have. Those are companies that we’re looking at more closely and getting a better perspective on the risk profile that they have.”