A.M. Best s 2010 Supplemental Rating Questionnaire (SRQ)

Transcription

1 A.M. Best s 2010 Supplemental Rating Questionnaire (SRQ) A briefing on Best s new SRQ questions January Towers Watson. All rights reserved.

2 BACKGROUND By February 1, A.M. Best will be releasing its 2010 Supplemental Rating Questionnaire (SRQ) The annual SRQ is an integral part of Best s rating process, with several data items linked to an an insurer s BCAR calculation (e.g., Best s measure of capital adequacy) On January 7, A.M. Best announced the changes to its 2010 SRQ to provide the insurance industry more time to compile the new information: By February 1, insurers rated by Best will receive the full SRQ document By April 1, insurers are to return the completed SRQ to Best The new enterprise risk management (ERM) and inflation questions may prove challenging for insurers to answer and could moderately impact their rating and BCAR over time Best is not expected to take any immediate rating actions in response to insurers answers to the new SRQ questions However, management should be prepared to articulate their understanding and risk management approaches in their annual rating meeting with Best This document provides a high-level briefing on the SRQ changes, including: Best s rating perspective Potential rating/bcar impacts Towers Watson client support towerswatson.com 2

3 2010 SRQ CHANGES Changes in A.M. Best s 2010 SRQ Contractual liability insurance policy (CLIP) Commercial specialty insurers are to provide premium and loss splits related to CLIP business that previously were commingled in the general liability category Earthquake probable maximum loss (PML) Workers compensation insurers are now to provide peak-time EQ PML ERM All insurers rated by Best are to answer qualitative/quantitative questions related to: Risk culture Risk controls and measurement Economic capital modeling Inflationary impacts to loss reserves All property and casualty insurers, if able, are to provide estimated impacts of future inflation on their loss reserves and planned mitigation strategies under top stress scenarios towerswatson.com 3

4 Perspectives and Impacts towerswatson.com 4

5 EARTHQUAKE PML Best s 2010 SRQ changes and impacts Best s 2010 SRQ Change Earthquake PML (Modified Question 26a) Best s Rating Perspective Random EQ PMLs declined considerably for both workers compensation and property, stemming from model revisions in 2009 Declines were larger than expected by Best (10% 30% in CA; 10%+ in other areas) If insurers reduced their EQ reinsurance, they need to be prepared to defend their position to Best Peak-time EQ PMLs, which are roughly double random EQ PMLs, will be incorporated in the rating process going forward ONLY applies to workers compensation writers Rating/BCAR Impacts Best is still focused on 250-year random EQ PMLs after reinsurance/tax Best will probe insurer s reinsurance in context of risk tolerance/erm Peak-time EQ PMLs will be evaluated relative to random EQ PMLs or as an additional stressed scenario Random EQ PMLs will continue to be included in the standard and stressed BCAR calculation Rating/BCAR impact: Expected to be low; but may be higher for thinly capitalized and/or concentrated WC insurers towerswatson.com 5

6 ENTERPRISE RISK MANAGEMENT Best s 2010 SRQ changes and impacts Best s 2010 SRQ Change Enterprise Risk Management (*) Best s Rating Perspective Large and small insurers need to take a more holistic or firmwide approach to managing and measuring risk accumulations and concentrations Best s new ERM questions are more probing but consistent with their longstanding ERM hot buttons Complex insurers are expected to be advancing their EC modeling and usage; simpler insurers are expected to be advancing their ERM frameworks and controls Through the new ERM questions, Best is accelerating its efforts to benchmark an insurer s ERM capabilities relative to its risk profile, volatility and peers Rating/BCAR Impacts BCAR requirements will be higher for insurers with weaker ERM and higher volatility, and vice versa Lagging ERM capabilities could accelerate negative rating actions, particularly for insurers with weak performance/higher volatility More ERM-related commentary is expected to be disclosed in Best s insurance reports as it relates to a company s rating and risk profile Rating/BCAR Impact: Moderate, but higher for insurers showing greater earnings/surplus volatility *Best s new ERM questions #55-#57 are listed in the Appendix. towerswatson.com 6

7 INFLATION Best s 2010 SRQ changes and impacts Best s 2010 SRQ Change Inflationary Impacts on Reserves (*) Best s Rating Perspective Although U.S. inflation seems to be under control, Best is closely monitoring A sizable inflation spike may increase claim severities and trigger adverse reserve development, more so for casualty insurers with above-average reserve leverage Inflation may exacerbate casualty insurers weakening reserve adequacy from soft market conditions Rating/BCAR Impacts Best s new inflation question focuses on an insurer s ERM practices with regard to its prospective reserve position and degree of deficiency under deterministic inflation scenarios Best may increase reserve deficiency adjustments in BCAR for perceived exposure to inflation Sizable reserve deficiencies can trigger a negative rating action Rating/BCAR Impact: Moderate, but higher for long-tailed casualty (re)insurers *Best s new inflation question #58 is listed in the Appendix. towerswatson.com 7

8 Appendix: Best s New ERM and Inflation Questions towerswatson.com 8

9 Best s risk culture questions focus on governance, board engagement, and embedding ERM throughout the organization Risk culture RISK CULTURE Do you have a chief risk officer (CRO) (or senior equivalent) who is responsible for coordinating ERM? Do you have an ERM committee? Are your strategies driven by risk/return measures? How often does the board review if the company s risk tolerances are acceptable? How often does the CRO/ERM committee report risk metrics and ERM activities to the: Board? Business units? Source: Best s 2010 SRQ document, question 55. towerswatson.com 9

10 Best s risk control questions focus on managing material risk accumulations and tracking them relative to expressed tolerances Risk identification/measurement/monitoring Who is most responsible for identifying material risks to the company s financial position? Within Best s six risk categories, describe the largest potential risk/event/scenario, and estimate its impact relative to the company s surplus: Market Credit Underwriting Operational Strategic Liquidity Where is risk tolerance defined at different levels within the organization? Who is responsible for monitoring whether tolerances of material risks are exceeded? How often are the material risks measured to see if their tolerances have been breached? Across all risks assumed, what is the largest net accumulated exposure with regard to your largest location and largest account? What business lines or risk types are most correlated to one another that could threaten the financial strength of the company? Source: Best s 2010 SRQ document, question 56. RISK CONTROLS towerswatson.com 10

11 Best s EC model questions ask insurers how they quantify aggregate risk, determine capital adequacy and allocate their capital Economic capital (EC) models EC MODELS If your company uses an EC model to quantify its aggregate risk: Do you use the EC model to make strategic business decisions? Do you use the EC model to determine any portion of management compensation? What are the three key drivers (or parameters) of the EC model that have the greatest impact on the financial strength or projected earnings volatility of your company? How often are these main drivers (or parameters) of the EC model updated? How often is the EC model run to evaluate changes in your risk position? If your company does not use an EC model to quantify aggregate risk: Describe how you determine capital adequacy and allocation of capital to business units, lines or risk categories Source: Best s 2010 SRQ document, question 57. towerswatson.com 11

12 Best s inflationary question focuses on stress scenarios and potential impact on loss reserves and planned mitigation strategies Inflationary impacts on loss reserves INFLATION Do you estimate the potential impact of future changes in general inflation on your current net loss reserve position? How often is this analysis conducted? Who is responsible for conducting this analysis? Describe three potential general inflation scenarios that you have identified as stress scenarios, along with their impact on loss reserves and planned mitigation strategy for each stress scenario, if any Source: Best s 2010 SRQ document, question 58. towerswatson.com 12

13 TOWERS WATSON CONTACTS Towers Watson s rating agency support team Eric Simpson eric.simpson@towerswatson.com Mark Murray mark.murray@towerswatson.com Shadi Albert shadi.albert@towerswatson.com towerswatson.com 13

14 Disclaimers The information contained in this presentation is based on various publicly available sources, including rating agency publications and websites. The rating agencies maintain proprietary models, and their assumptions and analyses may differ from those underlying this presentation and information. By extension, Towers Watson disclaims any warranty of any kind with respect to this material. The recipient acknowledges that this material does not imply, certify or guarantee any particular rating assignment. You agree that you will neither reference nor distribute any copies of this presentation to any other party and will place no reliance on the presentation and the information contained therein, or related thereto, that would result in the creation of any duty or liability by Towers Watson to you. towerswatson.com 14