Act quickly or risk downgrade, re/insurers warned ahead of new S&P capital model

S&P Global rated insurers and reinsurers need to “act quickly” or risk a rating change, even a downgrade, as a countdown to its new capital model begins. The agency is mulling a raft of key changes in its model that plays a big role in determining re/insurers overall financial strength rating.

A new report by Litmus Analysis suggests that this move could alter the ratings of up to 10 percent of insurers and reinsurers rated by S&P Global, if the proposals are implemented in their current form. The changes are expected to come into effect in Spring 2022.

The proposed changes for non-life insurers and reinsurers, disclosed in a Request for Comments (RfC) paper issued by S&P Global on Tuesday, December 7, indicates a “technical but fundamental shift” in how S&P credits diversification within its model. Litmus said this means that it will become much more predicated on the specific details of an insurers underwriting portfolio.

Other crucial changes include various aspects of the treatment of catastrophe exposures and of the use of debt capital, it added.

Given the scale and range of the proposed changes, and the potential number of consequential rating actions, Litmus is suggesting the insurers and reinsurers “rapidly assess the exact role the capital model outcome is currently playing in their S&P rating”.

It is also advised that rated carriers should consider their profile in the context of the thematic changes proposed, including the degree and nature of their diversification within and across both their product lines and investment portfolios, Litmus noted.

Stuart Shipperlee (pictured), managing director at Litmus Analysis, said: “Winners and losers from this are inevitable, but the best prepared and engaged insurers and reinsurers will have the best opportunity to manage this as well as possible.

“The devil will be in the detail of both how the model changes for any given rated group, or stand-alone rated carrier, impacts their model outcome and, crucially, how the rest of their credit profile - as per the wider S&P rating methodology - interacts with the model outcome.”

Rated carriers have until February 18 to provide feedback. However, Shipperlee underlined that given the nuance to it, and the vast number of carriers potentially affected, the process around deciding what feedback is given needs to start now. “It will only be a matter of months before all those insurers and reinsurers whose ratings may be impacted (positively or negatively) will be publicly identified.”

“We encourage insurers to make sure they understand the exact role the capital model outcome is currently playing in their S&P rating in the context of all the other elements of S&P’s rating assessment methodology. They need to consider how much of a model change would be needed to impact their rating and the extent to which other parts of the S&P methodology could be discussed with the agency to help offset any material negative model change.

“They should also consider their profile from the point of view of the thematic changes proposed, such as degree of product line and investment risk diversification, or whether their AEL PML position may increase in significance.”

“And, finally, if their operating equity is a function of debt issuance higher in the organisation chart that may no longer be credited, they should begin to consider alternatives. And that’s not just about other sources of equity capital or things S&P will see as equivalent - risk mitigation and changes to risk appetite may be other things to consider,” Shipperlee concluded.