NEWS
10% of insurers face S&P review post new capital model
In the fourth quarter S&P is likely to identify more than 10% of re/insurers for a potential upgrade or downgrade, says Litmus Analysis.
In the fourth quarter of 2023, rating agency S&P Global is likely to identify more than 10 percent of the insurers and reinsurers it rates as being under review for a potential upgrade or downgrade.
But there is no easy way of telling which way the change may go, which could cause uncertainty as the market heads into the key year-end renewal, Stuart Shipperlee, managing director, Litmus Analysis, told Monte Carlo Today.
The change is occurring because S&P expects to finally adopt its new capital model criteria in Q4. When it does this, its policy states that it must immediately and publicly identify all ratings that could change as a result—that could be either upgraded or downgraded, Shipperlee explains.
In May 2023 S&P publicly stated that it estimates that 10 percent of ratings could change. That covers both upgrades and downgrades (with S&P believing upgrades will be more common than downgrades).
The agency handles this disclosure by publicly designating ratings as being “under criteria observation” (UCO). But it will not typically have decided whether to actually change a UCO-designated rating at that point since it will then need to gather the information needed—and conduct the analysis—for presentation to, and review by, a rating committee.
That process could be quick—or could take months, Shipperlee notes. And, he stresses, guessing in advance which rated re/insurers will have UCO-designated ratings is not easy. He explains: “Broadly speaking, a re/insurer’s degree of balance sheet diversification across risk types will become a bigger factor within the capital model part of S&P’s rating analysis.
“That process could be quick—or could take months.”
Stuart Shipperlee, Litmus Analysis
“However, a lot of other proposed changes in the model criteria could collectively impact a re/insurer’s ratings positively or negatively—or simply offset each other.
“Ratings reflect a lot of non-public information, and forward-looking forecasts. And the capital model is only one part of the rating analysis.”
Under review
Shipperlee stresses that there will be no public disclosure by S&P of what the UCO status may imply: whether the rating change could be positive or negative or, indeed, the likelihood of any change at all (other than the fact that if no change were envisaged it would not be designated as UCO by S&P in the first place).
He says: “The UCO designation is just a flag that a future rating committee will be reviewing the rating specifically due to the new criteria.
“By contrast, rating outlooks are themselves a decision by a rating committee. Positive and negative outlooks reflect a rating committee’s conclusion that there is a reasonable degree of likelihood of that change happening over time (and what would drive it).”
“A lot of other proposed changes in the model criteria could collectively impact a re/insurer’s ratings.”
Even the rated re/insurers may have little idea of whether the change will be positive or negative (unless they have done a lot of homework) until after the rating analysts have received enough information—and conducted the associated analysis—to give an informed view. S&P may not tell them much until they are well into the review.
Shipperlee adds: “We understand that S&P does not expect its rating analysts typically to be in that position at the point of the UCO designation being assigned to any given re/insurer’s ratings.
“Indeed, this is one key reason we believe any rated re/insurers for whom a negative S&P rating action could be a material concern should be running the S&P prototype new capital model on themselves now—if they have not already done so,” he concludes.
Main image: Shutterstock / katjen
