A.M. Best solicits industry input on methods for rating insurance groups

A.M. Best is asking members of the industry to comment on a draft paper outlining how the ratings agency proposes to rate members of insurance groups — including its treatment of local branch operations, which are prevalent in Canada.
In its paper, ‘DRAFT: Rating Members of Insurance Groups,’ A.M. Best says one of the main themes in its analysis of insurance groups is the explicit and implicit support a parent company provides its subsidiaries.
“These factors, together with any legal constraints on the free flow of capital among affiliates, will determine an insurance subsidiary’s rating enhancement or drag and its ultimate rating assignment,” the report says.
Where its treatment of branches is concerned, A.M. Best notes a true branch is not a separate legal entity and is viewed as an extension of the home office.
“As such, policies are written on the paper of the legal entity of which the branch is a part,” the report notes. “Therefore, a true branch is assigned the rating of the head office.
“This is the case in Canada, where many global insurers do business through a local branch operation.”
However, several factors could change the branch’s rating up or down from the parent company, A.M. Best notes.
“Ratings of branch operations will include an evaluation of the impact of home-office laws on branch policyholders’ prospects for recovery (relative to the prospects of the home-office policyholder),” the report says.
If, for example, branch policyholders can only access domestically held assets, and these assets are inadequate to cover all of the branch’s obligations, the branch rating might be notched downward from the home office rating.
The downgrade of the branch would not be automatic, however.
“For example, if the organization’s overall book of business was written 90% in the branch operation and 10% in the home office, subordination [of the branch to home office] would be less of an issue.”
Conversely, if the branch were more thinly capitalized, the downgrade might apply.
The full report is available at: http://www.ambest.com/ratings/methodology.asp