A.M. Best seeks input on risk management ratings methodology

A.M. Best Company Inc. has put out a call for comments from market participants in the insurance industry and other interested parties on a draft of its Risk Management and the Rating Process for Insurance Companies.
The draft methodology outlines how risk management is incorporated into the overall rating process, including the development of capital requirements underpinning A.M. Bests rating opinion on insurers and reinsurers.
Currently A.M. Best uses a BCAR, or Bests capital adequacy ratio, to differentiate between companies and indicate whether a companys capitalization is appropriate for a particular rating level.
The fundamental difference in the revised approach is that for companies with strong risk-management capabilities, A.M. Best will consider allowing companies to maintain BCAR levels below the guideline for their ratings based on a case-by-case evaluation of an insurers overall risk-management capabilities relative to its risk profile, according to the draft proposal.
To qualify for this treatment, companies will typically have all of the following:
1.superior traditional risk-management fundamentals, relative to the insurers risk profile, in each of the five key risk types;
2.superior capital management and financial flexibility, providing the organization with cost efficient access to capital even in distressed scenarios;
3.strong enterprise risk management characteristics;
4.strong economic capital modelling capabilities; and
5.low earnings and capital volatility.
Written comments can be submitted by email to rating.methodology@ambest.com no later than April 6, 2007.