A.M. Best’s Mosher Outlines Updates to Best’s Credit Rating Methodology
November 16, 2016 by John Weber
OLDWICK, N.J. – In an interview with A.M. BestTV, A.M. Best’s Matthew Mosher reviews the latest announcements and timetables for updates to Best’s Credit Rating Methodology and Best’s Capital Adequacy Ratio, and how those apply to various insurance sectors.
View the video version of this interview at: http://www.ambest.com/v.asp?v=bcrm1116
Following is an edited transcript of the interview.
Q: A.M. Best is re-releasing for public comment planned changes to the Best’s Credit Rating Methodology, or BCRM, as well as criteria procedure updates for its Best’s Capital Adequacy Ratio for property/casualty insurers. These new updates come as a result of discussions with insurance industry stakeholders, which we’re going to get to in just a minute. A.M. Best also will be releasing details on proposed revisions to its criteria procedures for the U.S. and Canadian Life, Health and Universal BCAR.
With me to talk about all of these developments is Matthew Mosher, executive vice president and chief operating officer of A.M. Best Rating Services Inc. Matt, take us through what’s being released here.
A: After a lot of hard work and reviewing many different comments, today we’re releasing our Best’s Credit Rating Methodology, which will basically be a walk-through of how you get from balance sheet strength, operating performance, business profile, enterprise risk management to an overall rating.
Also we’ll be releasing the BCARs for the property/casualty U.S. industry, the Life/Health BCAR for U.S. and Canada, and our Universal BCAR, which we use to cover any non-U.S. statutory-type filer or Canadian statutory filer, which allows us to take many different financial statements and put them together to evaluate the capitalization of the company.
It’s been a lot of work, and we’ve finally gotten it out. What we hope to do in the next few weeks is to share with companies the output from the 2015 BCAR so they’ll have a view of how we would look at their capitalization under this new modeling process and also, with the new methodology being out, they will get a feeling for how it fits into the overall rating process that we have.
Q: What is the timeline for the release of the BCAR scores?
A: We would expect the U.S. BCARs will come out sometime before the end of November and the Universal BCARs, which are all the non-statutory and non-U.S. type of BCARs, will probably be early in December, likely the first two weeks of December so people have a chance to take a look at it.
Q: When will the comment period end?
A: We have a comment period that will go through the first of March. We encourage everybody to make comments in terms of their views of what we’re looking at for capitalization in terms of the capital models, particularly in the Universal and Life/Health BCAR models, which are new, as opposed to Property/Casualty, and the Best Credit Rating Methodology, which has been out before. We’ve gotten a lot of comments on those areas, but we expect more comments, particularly from the life side, in dealing with some of the asset risk that’s out there.
Our expectation is that we’ll have webinars early in December to go through the process of what we’re changing to give people an understanding. They’ll have their output and get their chance to understand how it all fits together. Hopefully at that point they will have some thoughts in terms of what they would like to share with us in comments and what’s out there.
Q: When do you expect the BCRM and BCAR updates will be implemented?
A: At this point it’s going to vary depending on the amount of comments that we have; but we don’t expect anything to be finalized and be utilized in the rating process until September of 2017.
Q: You mentioned the ratings. Will this impact ratings?
A: There will be some impacts. At that point in time, when we put the methodology and the BCARs out, we’ll have to mention to those companies there’s a possibility of an impact. Percentage-wise it’s fairly low, in the single digits. Our initial view was that our ratings are appropriate as they stand, and we weren’t looking to change what we’re doing because we feel our ratings are appropriate.
Best’s Credit Rating Methodology, what it does is it organizes the process much better, in my view, of how we go through evaluating balance sheet strength, business profile, operating performance and enterprise risk management to arrive at a final outcome. It ties together how the BCAR fits into the process. There is more of a building block approach. It lays the framework down, but it’s not something that we expect to see a lot of new issues coming up because these are issues we’ve always been looking at.
We think the capital model will provide a little bit more granular view of capitalization and have a better feel for the risks that a company has, but again, not something that’s going to change dramatically the number of ratings.
Q: Did the last comment period impact your thinking on the new methodology in any way?
A: It did. We did make some changes. We went through and we looked at how far out on the tail we were including in the actual hard-coding into the methodology. We felt we were getting a little too aggressive in terms of the modeling and what’s done in terms of the impact of assumptions. We’ve backed that off. It’s something that people will see in the new methodology, where we only go out to the 99.6% confidence interval or the one-in-250-year level.
We feel that modeling is continuing to improve, but we need to see continued improvement before we hard-code some of that into our analysis because assumptions just play too much in terms of the outcome when you get further out in the tail.
Some of the other things we looked at were how much stochastic modeling we have in there. We are moving that out. We’re not running individual stochastic models on each company. We’ve used stochastic modeling to come up with the risk factors that we’re utilizing. Because it’s a model, it’s applied globally.
We did feel that we had to have something that would be utilized across all types of companies and also be able to do a what-if type of assessment if a company changes their reinsurance portfolio or changes their investment portfolio. When you bring stochastic modeling into that, it changes the dynamics of doing the what-if type of approaches.
We also looked at some of the investment risks and changed some of the views we have on the investment risk as well as interest rate risk in the property/casualty model, that too was something we’ve changed. There were a fair amount of comments that came through.
We’ve had a large number of comments that came through the June 30 timeline that we had and we’ve spent a lot of time working through that and readjusting where we’re at on the Property/Casualty BCAR, particularly, but also that impacts the Life BCAR and the Universal BCAR as we work through that.
Q: What’s your timeline on criteria updates for U.S. and Canadian Life/Health and Universal BCAR?
A: That will follow the comment period that we have out. Those methodologies on the BCARs are out today. We expect the comment period to close on March 1. Then we’ll look at the comments that are out there.
As we did with the P/C BCAR when we went through it, if we see something that’s coming through heavily in the comment period we may come back out with perhaps an update or a comment to give people an idea of some of the key issues and changes that might occur after we go through the full comment period.
Before we come out with a new update to the actual methodology or criteria procedure, we would wait until the end of the comment period and look at all the comments and make that decision.
We want to make sure we’re communicating with the industry. They understand the risks that we’re seeing. They understand the comments we’re seeing and, potentially, what direction we’re going in.
We’re not trying to come out and say at the last minute, here’s what the model is. We want people to understand what the risks and what our potential changes are going to be.
View this and other interviews at http://www.ambest.tv
(By John Weber, senior associate editor, A.M. BestTV: John.Weber@ambest.com)
