Ratings agency creates ERM rating for insurers

Standard & Poor’s Ratings Services has developed a separate enterprise risk management (ERM) category for insurers and other financial institutions, the ratings service has announced.
“What the new ERM category delivers to investors is greater transparency, in that users of ratings will be able to more readily access Standard & Poor’s views on risk management and how that affects the rating,” S&P says in a statement.
Criteria published in a paper entitled “Insurance Criteria: Evaluating The Enterprise Risk Management Practices Of Insurance Companies” define the new ERM component of the rating analysis for insurers. Insurance companies will be now be rated on the basis of whether they have weak, adequate, strong, or excellent ERM. The major components of the new ERM criteria are risk-management culture, risk controls, extreme-event management, risk and capital models, and strategic risk management.
S&P will evaluate each aspect of the company’s ERM program and form separate views on each part of the program. Ratings will be applied to each of the above five components using the grades of weak, adequate, strong, or excellent.
“A company with excellent ERM will have excellent or strong quality for all five components of ERM,” the ratings service says. “A company with weak ERM will have weak or adequate quality for all five components.
“Companies with adequate or strong ERM quality will be those with a range of quality in the five components with the strong companies having a preponderance in the ‘excellent’ and ‘strong’ areas and the adequate companies having the majority in the ‘adequate’ or ‘weak’ areas.”
The criteria outlined in the document “describe the framework and the attributes that will be employed in the assessment process and represent what we believe are best practices,” said Standard & Poor’s credit analyst Prodyot Samanta. “These are not necessarily widely applied in the industry.”