Canadian Underwriter

A.M. Best releases methodology publication on insurance-linked securities

August 18, 2016   by Canadian Underwriter

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Oldwick, N.J.-based ratings firm A.M. Best Company has announced the publication of its new Best’s Insurance-Linked Securities & Structures Methodology (BILSM).

Business LeadershipThe publication follows a public comment period that began on May 16 and closed on June 16, A.M. Best said in a press release on Tuesday. This final document contains just minor changes relative to the version released for comment.

The BILSM provides an outline and summarization of the methodology A.M. Best utilizes to rate insurance-linked securities and insurance-linked structures (ILS) and also will be the ongoing central repository for “Best’s Idealized Issue Default Matrix” and “Best’s Idealized Issuer Default Matrix.” The BILSM offers readers insight into the information requirements, key rating considerations, risk modelling and surveillance activities that are generally applied by A.M. Best to rate ILS transactions, including the rating of ILS funds and their obligations, the company explained in the release.

“In some cases, ILS transactions are rated using structured finance technology by considering the credit profile or risk characteristics of the assets, liabilities, triggers or legal structure that affects the payment of interest and principal to investors,” A.M. Best explained on its website. “In other cases, ILS transactions that have the ‘look and feel’ of an insurance company are rated based on a set of methods that may also include structured finance technology, and while less emphasis may be placed on certain factors such as financial flexibility and/or business profile, these types of transactions will be evaluated based on Best’s Credit Rating Methodology (BCRM), and its supplemental criteria procedures.”

Regarding the BILSM, A.M. Best said that it expects that at least one rating may be impacted by the changes to default tables included within the methodology.

Concurrent with the release of the BILSM, A.M. Best is retiring two criteria procedures: “Best’s Idealized Default Matrix” and “Securitization of Reinsurance Recoverables.” The default matrices found in BILSM will supersede all existing versions of default matrices in currently published criteria procedures, making the separate criteria procedure “Best’s Idealized Default Matrix” redundant.

A.M. Best does not currently have any outstanding ratings utilizing the “Securitization of Reinsurance Recoverables” criteria procedure. Accordingly, no ratings will be impacted by the retirement of this criteria procedure, the company said.

In March, A.M. Best published proposed revisions to its core credit rating methodology BCRM. At the same time, it released proposed revisions for the criteria procedure for the United States property Best’s Capital Adequacy Ratio (BCAR). Implementation of the new credit rating methodology and BCAR models is expected in the first quarter of 2017.

The BILSM and related criteria procedures are available at