The document describes the proposed changes on S&Ps methodology for evaluating insurers (and reinsurers) economic capital models (ECMs) under the current enterprise risk management (ERM) criteria. This is to support in S&Ps quantification for rated insurers risk and required level of capital to assign appropriate rating category.
S&P evaluates the quality of ERM as four categories e.g., excellent, strong, adequate, or weak. The proposed ECM, which they call as ERM Level III review is in addition to the following five elements of assessing the strength of insurers ERM.
Risk management culture
Risk controls
Emerging risk management
Risk and economic capital models
Strategic risk management
The ECM model review will replace the current static risk based capital (RBC) model where the credibility of ECM will be measured by the M-factor. It is important to mention here that S&P considered the following factors to determine insurers financial strength rating in addition to the assessment of ERM.
Management strategy
Financial flexibility
Earnings
Liquidity
Market position
Investments, and
Capitalization
Commenting on the significance of the ERM level III review, S&P proposed that the insurers with credible ECM may be awarded the excellent category towards their strength in ERM. However, S&P emphasised that the analysis of ECM is only one consideration in its overall assessment of ERM.
This sixty-page document is available on www.standardandpoors.com/ratingsdirect and interested reviewers can submit their written comments by 19th July, 2010.
