A.M. Best requests comments on draft ratings criteria for Canadian P&C insurers

Oldwick, N.J.-based ratings firm A.M. Best Company is requesting comments from market participants in the insurance industry and other interested parties on the draft criteria reporting Understanding BCAR for Canadian Property/Casualty Insurers.

BCAR, or Best’s Capital Adequacy Ratio, is calculated by dividing a company’s adjusted surplus by its net required capital, after a covariance adjustment, A.M. Best explained. It depicts the quantitative relationship between a rating unit’s balance sheet strength and its operating risks.

A.M. Best continues to refine its proposed Best’s Credit Rating Methodology (BCRM) to further increase transparency and consistency, the ratings firm explained in a press release on Thursday. Companies that are evaluated using this BCAR model will receive their new BCAR output. Company management is encouraged to review their BCAR output, when received, in conjunction with this criteria procedure, A.M. Best said.

Structurally, A.M. Best’s Canadian BCAR model is adapted specifically to the Canadian Annual Return and Supplement, as well as Canada’s accounting standards, A.M. Best explained in a statement issued last June. For Canadian Annual Returns and Supplements, BCAR calculations are performed using data from consolidated exhibits, effectively creating standalone BCARs for subsidiary companies, but consolidated BCARs for parent companies. “However, if it is determined that the parent company may be the cause of the weaker consolidated BCAR, then a standalone BCAR for the parent-only insurer can be created using additional information supplied by the parent company,” the statement noted.

A.M. Best’s Canadian capital formula takes a risk-based capital approach, with net required capital calculated to support three broad risk categories: investment risk, credit risk and underwriting risk. The formula does contain an adjustment for covariance, reflecting the assumed statistical independence of the individual components.

In addition to the draft criteria for Canadian P&C insurers, 12 other draft BCRM-related procedures were released for comment, related to, among others, analyzing perpetual insurers, alternative risk transfer, evaluating country risk, rating Lloyd’s operations and rating reinsurance pools. A.M. Best expects to release another batch of criteria procedures later this year.

Some of these draft criteria procedures are amalgamations of current, in-use criteria procedures; those that relate to the rating of specialty insurers emphasize what is unique or different between the analysis of the specialty insurer and the analytical process as outlined in the draft BCRM.

These draft criteria procedures are available in the methodology section of A.M. Best’s website. The ratings firm is requesting comment on these draft criteria procedures from insurance industry participants and other interested parties. Written comments should be submitted by email to methodology.commentary@ambest.com no later than May 31.