Methodology of entity rating Property/Casualty Insurers

Transcription

1 ASSEKURATA Assekuranz Rating-Agentur GmbH January 2017

2 Contents CONTENTS... 2 INTRODUCTION Rating Process Order Placement Data Requirement Document Analysis Management Interview Drawing up the Rating Report In-house Quality Assurance Rating Decision in the Rating Committee Rating Scale Rating Communication Publication Regular Monitoring and Follow-up Rating Rating adjustments Withdrawal of the Rating Rating Methodology Partial Qualities The Partial Quality Security The Partial Quality Success The Partial Quality Customer Orientation The Partial Quality Growth/ Attractiveness in the market

3 Introduction The entity rating of Assekurata rates German primary insurance companies from the point of view of their essential creditors, the policy holders. The overall quality of the entity is primarily analysed and rated from the customer s point of view based on differentiated partial qualities. Each partial quality is given an own grade which for their part are then compiled to the overall result according to a specified model. The partial qualities deal with security, success, growth/attractiveness in the market and the customer orientation of the insurer. These criteria of life insurers are supplemented by profit sharing/performance and the private health insurers are supplemented by the partial quality premium stability. The partial qualities Customer Orientation and Security are criteria for exclusion in the Assekurata entity rating: should one of these criteria be rated lower than still satisfactory the overall rating is lowered to the level of this partial quality. Assekurata considers a rating result still satisfactory in the partial quality security or customer orientation as necessary prerequisite for a minimum rating still satisfactory. 3

4 1. Rating Process 1.1 Order Placement At the start of a rating the entity to be rated and Assekurata conclude a rating contract. In the contract Assekurata is committed to confidentiality in connection with the rating during said rating process. Confidentiality regarding the results continues to be maintained after termination of the rating should an insurer decide against publication of said rating. In return, the entity discloses comprehensive internal data in the course of the rating process and the executives are at disposal for interviews. Assekurata keeps in very close contact with the entity during the entire rating process. The operative contact (rating coordinator) ensures a smooth exchange of information in real-time. The contact at Assekurata is its respective senior rating analyst. 1.2 Data Requirement After order placement the entity to be rated receives a list with the information and documents required. These are among others required for pre-analysis purposes and to prepare the management interviews. The data volume depends on whether the rating is an initial or a follow-up rating. Customarily Assekurata requests the entity to be rated to submit the following documents: Reporting and accounting: e.g. export files of data transmission to insurance supervisory office (DÜVA), audit reports, annual reports, reporting to the supervisory board, annual financial statements, reports on earnings development, medium term budgeting, continuous profit and loss projections, Solvency II-reports, BaFin (Federal Financial Supervisory Authority) evidence for individual and group solvency, results of the respective latest BaFin stress tests Management/Group Structure: e.g. entity s strategy, organisation charts, ownership structure, portfolio of the board members, outsourced functions, existing corporate contracts, contingencies, letters of comfort, capital injections and capital drains Human Resources: e.g. personnel statistics, quantitative and qualitative planning of human resources, education and training programmes, employee surveys, pension provisions Customer Orientation: e.g. service times, service level agreements, guidelines/key figures/ statistics for telephony, and correspondence and for processes regarding requests, contracts and claims as well as onlineservices and complaints Products/ Marketing/ Sales: e.g. area of business operations, shares of the market, market share shifts, product portfolio, product features, product planning, assistance services, sales channels, education programmes for sales partners, sales-support, sales reports, contracts with sales partners Actuarial practice: e.g. underwriting, calculation base, claim reserve calculation, reserves within the claim reserves, run-off triangles, claim management, reinsurance policy and relations Capital Investments: e.g. capital investment strategy, asset allocation, reserve policy, human resources and technical line-up of the capital investment, risk information regarding the individual capital investments, risk management in the capital investment Enterprise Risk Management: e.g. implementation of the Solvency II-requirements, risk strategy, organisation of the risk management system, risk control process, risk model, riskbearing capacity concept, asset liability management, governance system, risk reports, solvency and financial reports, Own Risk and Solvency Assessment (ORSA), audit reports, business continuity management, emergency planning, emerging risks, fraud prevention. 1.3 Document Analysis The content analysis of the data includes the upgrading/downgrading and plausibility check of the information from the various sources. Subsequently the analysts at Assekurata evaluate the information both with regard to quantity and quality using data bases and analysis systems and not least detailed checklists catalogues. The information gained form the basis for the survey ques- 4

5 tionnaire of the executives in management interviews. 1.4 Management Interview The management interview is a key element of entity rating. Hereby the rating team, jointly with the management, discusses topics such as, for instance market development, strategy of the entity, human resources development, risk management, product policy, reinsurance policy, capital investment strategy, sales channel structure, calculation basics, underwriting and the development of premiums. The purpose of the interviews is to scrutinize the entity key data and to include such quality aspects in the rating, the latter cannot be derived from the figures alone. Depending on entity structure and importance of the entity s units, further locations are also inspected apart from the headquarters. The number of meetings and duration of the stay depend on the size and complexity of the entity. 1.5 Drawing up the Rating Report The information and data gained in the management interviews are analysed together with the documents collected in the run-up and evaluated on the basis of checklists and catalogues. The results are documented in the rating report. The rating team discusses the notation proposal for the rating committee. Each member shares the responsibility for the rating and the quality of the report. 1.6 In-house Quality Assurance Stringency and consistency of the models, methods and processes implemented undergo quality assurance in an in-house rating colloquium of Assekurata. Apart from the analysts involved, the managing director of analysis and rating, the head of analysis and rating and on demand the coordinator of quality assurance participate in this inhouse rating colloquium. After the rating proposal has been checked by the in-house rating colloquium it is sent to the external members of the rating committee. 1.7 Rating Decision in the Rating Committee The rating committee checks and discusses the proposal of the rating team. The final rating must be resolved unanimously. The rating committee is made up of the respective senior rating analyst, one and at least two external experts. The credit rating of Assekurata is therefore an evaluation of experts. In-house members of the Rating Committee: Senior rating analyst Assekurata head of analysis and rating division: Abdulkadir Cebi (authorised signatory) or Lars Heermann (authorised signatory) External members of the Rating Committee: Graduate of business management Stefan Albers, legally appointed insurance consultant Graduate of mathematics Marlies Hirschberg-Tafel, former chairwoman of an insurance company Rolf-Peter Hoenen, former chairman of an insurance company and former president of the German Insurance Association (GDV) Graduate of business Rainer Husch, former partner of an auditing company Graduate of mathematics Reinhard Kunz, actuary DAV, former chairman of an insurance company Thomas Krüger, former chairman of an insurance company Prof. Dr. Torsten Rohlfs, auditor, Professor of risk and claims management at the Institution for Insurance at the University of Applied Sciences Cologne Graduate of business Ulrich Rüther, former chairman of an insurance company Prof. Dr. Heinrich R. Schradin, Director of the Institute of Insurance Studies at the University Cologne The same requirements apply to the external rating committee members with regard to their impartiality as do to the in-house rating analysts: A member of the rating committee is excluded from the rating should the latter s impartiality possibly give reason to doubt. This would particularly be the case if the member should hold an office, e.g. in a supervisory board of the insurer to be rated. In such a case the said rating committee member neither receives the rating proposal nor can he/she participate in the meeting. The impartiality of Assekurata is, furthermore, laid down in its statutes and cannot be changed, not even by a shareholders meeting. 1.8 Rating Scale The rating scale is sub-divided into eleven quality findings from A++ (excellent) to D (poor), which are summed up in five categories. Rating Definition Category 5

6 A++ An insurance company rated A++ fulfils the quality requirements and the quality expectations of the policy holder excellently. A+ very good Very good A good Good A- substantially good B+ fully satisfactory Satisfactory B satisfactory B- still satisfactory C+ weak weak C very weak C- extremely weak D insufficient insufficient 1.9 Rating Communication After the rating decision the senior rating analyst informs the rating object by letter (and ordinarily by telephone) about the results. This information is carried out on the same day of the rating decision. The board of the rating object decides in the next step whether the rating can made public. The publication has to happen no later than five working days after the rating decision. Furthermore the publication needs to be approved in written form by the board of the rating object. Should the insurer decide to grant an approval for the rating, the rating can be used in public for one year. If the entity concerned objects to a publication, Assekurata also respects observation of confidentiality with regard to the rating. Regardless of a publication ordinarily the rating object is delivered an internal rating report, which provides detailed information about the rating decision and the results. Furthermore, the rating team generally presents the results to the executives of the insurance company in a final presentation Publication The publication of a rating is carried out in different ways: Press Release: Assekurata informs the public by a press release. Rating Report: The analysts compile the rating in a report for the public. Assekurata places it on its website for free reading and downloading. Quality seal: Assekurata-credit ratings comply with a high standard. Rated companies acquire a quality seal which provides credible evidence of their quality in the market. Data storage of the European Supervisory Authorities ESMA: Assekurata is committed to report its published ratings to central data storage, to so-called Central Repository for Credit Rating Agencies (CEREP). You find further information under Rating Platform: As member of the European Association of Credit Rating Agencies (EACRA) Assekurata is willing to publish ratings on the global rating platform supported by EACRA. You find further information under Regular Monitoring and Follow-up Rating The Assekurata entity rating is, on principle, valid for a period of twelve months after disclosure. During this period the development of the entity and of the rating is monitored continuously by the senior rating analyst. The topicality of the rating is thus ensured at all times. To ensure the topicality a follow-up rating has to be carried out by the end of one year. However, the insurance company is not obliged to accept. In the updating phase the previous rating remains in force. If a follow-up rating is not carried out, the rating may not be used in public after expiry of the 12-month deadline. Assekurata informs the public by means of a press release that the rating is no longer applicable Rating adjustments Should extraordinary incidents or developments occur in the validity period, which have an impact on the rating of the entity, Assekurata may adjust the rating even before the 12 months expire. 6

7 Should, in the opinion of Assekurata, the adjustment of a rating become necessary, Assekurata informs the entity concerned correspondingly. The public is informed by entering the rating concerned in the Watchlist and a corresponding press release is sent out. Thereby the rating report is not adjusted; however, the partial qualities which are currently on the Watchlist are mentioned. Assekurata identifies companies, the ratings of which are currently in the Watchlist with the suffix Ratingw on its website. For checking purposes Assekurata demands detailed information in connection with the rating from the entity concerned, which involves both the partial qualities and the overall rating. Ratings on the Watchlist do not necessarily lead to a change of the rating notation. The rating committee of Assekurata makes a decision on whether partial qualities or the rating, respectively, may possibly have to be adjusted (upgraded or downgraded). Should the latter be the case, the rating report is adjusted correspondingly. The downgraded rating remains valid until the initial rating is no longer up-to-date. By the EC regulation 1060/2009 Assekurata, as regulated Credit Rating Agency (CRA) is committed, in case of a fundamental adjustment of the rating model to check the current rating of the client once again. Should the verification lead to a change of the rating, the regulations governing the modus operandi for extraordinary occurrences apply analogously Withdrawal of the Rating Should the entity be deprived of its fundamentals for the published rating due to particular developments (e.g. by merger, transfer of stock/portfolio or the similar), the published rating will be withdrawn. Even in the cases in which Assekurata cannot maintain the original result, in which however the entity concerned rejects a downgrading or even to co-operate, a rating is withdrawn. In the latter case Assekurata informs the public in the form of a press release. After the withdrawal the rated entity can place a new order for a rating. Simultaneously the rated entity can inform the public about the revision of the withdrawn rating. 7

8 2. Rating Methodology 2.1 Partial Qualities An Assekurata entity rating is made up - depending on the insurance segment of the rated entity of four or five partial qualities, respectively. Hereby the particularities of the business operations and the business risks are taken into account. The partial qualities Security and Customer Orientation are of particular importance with a crucial impact on an Assekurata entity rating: Should one of these partial qualities be rated lower than still satisfactory, the overall rating is downgraded to this level. Each partial quality in the Assekurata entity rating is sub-divided in the analysis of key figures and a factor analysis. Hereby the particularities of the entity are considered. The key figure analysis is based on numerous economic key business figures considering market related benchmarks. The factor analysis is used to rate the soft qualitative entity factors. Hereby an expert assessment is carried out particularly for the facts which cannot be adequately displayed by key figures. Therefore the Assekurata entity rating is not a purely mechanical rating of the key figures but always the opinion of experts. To allow quantitative and qualitative effects from changes beginning to emerge flow into the rating, Assekurata considers both the key figure analysis and the factor analysis in the planning and potential of an entity. The partial qualities in the entity rating for property/casualty insurers are weighted as follows: satisfactory result in this partial quality is rather a necessary condition than a sufficient quality feature for Assekurata. To do justice to the special importance of the partial quality Security, a crucial impact becomes effective: Should the partial quality Security be rated lower than still satisfactory the overall rating is downgraded to the rating of the partial quality Security. The rating of the partial quality Security is based on key figures of security and the enterprise risk management of the insurer. The key figure analysis in property/casualty insurance covers substantially security capital (e.g. equity, equalisation fund), the claims reserves, supervisory solvency and the risk-adjusted solvency according to the Assekurata-Value-at-Risk approach. The Enterprise Risk Management considers, apart from the organisation of the risk management, substantially the management of insurance risks, capital investment risks and other risks (such as strategic and operational risks)as wells as the networked management of the risks. 2.3 The Partial Quality Success The realisation of profits is, in the opinion of Assekurata, necessary for the long-term existence of the insurer no matter what the legal form is and the business mix dealt with. In addition, the personal insurers can only ensure the policy holders guaranteed performance, attractive profit sharing or the cushioning of necessary premium adjustments by stable earnings. The partial quality Success takes into account the various success 2.2 The Partial Quality Security The security of an insurance company is one of the fundamental analysis aspects in the Assekurata entity rating. Sufficient sustainable security should particularly be available to personal insurers, after all, as a rule the policies are in their inventory for a long time and customers therefore have a primary interest in the long-term sustainable security of the insurer. In entity rating a still Weighting in % Security 33,33 Success 22,22 Customer Orientation 33,33 Growth/Attractiveness in the market 11,11 sources and the long-term success perspectives from the point of view of the customer. In this case Assekurata rates how successful an insurer 8

9 manages customers money and its equity capital. The rating of the partial quality Success is based on key figures of success and the success factors. The key figure analysis is substantially comprised of the actuarial earnings, the capital investment earnings (e.g. net return) and the key indicators of overall surplus (e.g. the surplus ratio). Apart from the key figures of success Assekurata considers the forward-looking earning potentials of an insurer. Thereby substantially the actuarial success criteria (e.g. regarding the calculation, the inventory compilation or the claims management) and the capital investment success criteria (e.g. regarding the strategy and management) flow into the rating. 2.4 The Partial Quality Customer Orientation Customer Orientation is of particular importance in the Assekurata ratings: If the rating of this partial quality is lower than still satisfactory, the overall rating is lowered to at least this level. The valuation of the partial quality Customer Orientation is comprised of customer survey results and customer orientation factors. The satisfaction and loyalty of the (final) customer has a sustainable influence on the long-term insurance business. Therefore the Assekurata entity rating includes the experiences of the policy holders in the rating by means of a customer survey. In this respect 800 customers of the insurer are questioned as a standard. Both customer satisfaction and customer loyalty are included in the overall assessment of the partial quality Customer Orientation as key figures in the form of indices. Apart from the overall satisfaction other aspects such as image and confidence influence the customer satisfaction index. The customer loyalty index results from components of behaviour, such as future recommendation willingness or repeated willingness to conclude the contract. In addition to the final customer survey (B2C) it is possible to include the satisfaction of B2Bpartners within the rating. It must be possible to transfer B2B external surveys not contracted and carried out by Assekurata - into the existing rating system with regard to the survey system, the answer categories and the survey contents. Thereby Assekurata considers two indices, which are comprised of a performance component (e.g. processes, price performance ratio) and an experience component (e.g. confidence, reliability. Apart from the results of the customer surveys the customer orientation factors of an insurer flow into the rating of the partial quality Customer Orientation. Hereby Assekurata considers substantially the consulting and the support (for example in the office and for sales partners), the service processes (e.g. communication, telephony, , correspondence, duration and quality of processes regarding requests, contracts and claims, respectively claim management, complaints) as well as the product portfolio and policy. 2.5 The Partial Quality Growth/ Attractiveness in the market In the Assekurata entity rating growth applies as a necessary prerequisite for risk balance in the ensemble of ensured parties, to economic cost recovery and long-term survival of the entity. In addition, growth is an indicator for the attractiveness of an insurer in the market. In order to find a rating Assekurata refers to key figures of growth and growth factors. The key figures substantially consider the inventory and new sales development (for example growth of premiums, growth of policies, growth of persons (health insurance)) as well as the sustainability of the growth (e.g. cancellation rates). In addition, Assekurata also analyses qualitative growth factors and, with an eye to the future, the growth potentials in products and sales organisation of an insurance company. 9