Fitch outlines new Core Capital Adequacy Ratio

Fitch Ratings has published details about its new financial guaranty capital model called Matrix.
The key measure in the model is the Core Capital Adequacy Ratio (CCAR), which is derived from the following two basic measures:
The total Adjusted Claims-Paying Resources (ACPR), and
The total Required Claims-Paying Resources (RCPR).

ACPR
Components making up an insurer’s ACPR include things such as policyholders’ surplus, unearned premium reserves, loss and LAE reserves, equity-like soft capital facilities (such as contingent preferred stock put facilities) and the present value of future installment premiums.
The total of the ACPR factors listed above would be subtracted by the required capital needed to support factor-based charges for exposures such as investment portfolio and guaranteed investment contracts (GICs), as well as adjustments made to the present value of installment premiums for simulated bond defaults.

RCPR
RCPR includes the present value of stochastically (dynamically)-generated insured portfolio claims simulated over a 10-year time horizon. Subtracted from this would be credit provided for reinsurance or reinsurance-like soft capital credit facilities. There would also be a factor charge for anticipated runoff expenses.

CCAR
The CCAR is determined by dividing the company’s ACPR by the company’s RCPR. “Each [financial] guarantor at a minimum must be at 1.00x for its given rating threshold,” Fitch says in a release announcing the new model.

Fitch says it will provide CCARs at various rating thresholds for each financial guarantor.
“Those CCARs offer an indication of the potential volatility of results, due to business mix, insured portfolio quality, etc.,” the ratings agency said in a release. “A financial guarantor that does not continuously ‘pass’ at the minimum rating threshold for its given insurer financial strength (IFS) rating is at risk of being downgraded, following a reasonable period to cure or improve model results during the initial introductory period [of the Matrix].
“Accordingly, Fitch looks favourably on companies that operate with a safety cushion over and above theor minimum thresholds, since simulated RCPR levels are likely to change over time as the risk characteristics of the insured portfolio change.”