Economic Capital Review by S&P

Standard & Poor’s started including an evaluation of insurers’ enterprise risk management in its ratings in late 2005. Companies that fared well under the stick of ERM evaluation there was the carrot of potentially lower capital requirements.  On 24 January, S&P published the basis for an economic capital review and adjustment process and announced that the process was being implemented immediately.

The ERM review is still the key. Insurers must already have a score from their ERM review of “strong” or “excellent” before they are eligible for any consideration of their capital model. That strong or excellent score implies that those firms have already passed S&P’s version of the Solvency II internal mode use test — which S&P calls strategic risk management (SRM). Those firms with the strong and excellent ERM rating will all have their economic capital models reviewed.

The new name for this process is the level III ERM review. The level I review is the original ERM process that was initiated in 2005. The level II process, started in 2006, is a more detailed review that S&P applies to firms with high levels of risk and/or complexity. That level II review included a more detailed look at the risk control processes of the firms.

The new level III ERM review looks at five aspects of the economic capital model: methodology, data quality, assumptions and parameters, process/execution and testing/validation.

Read More at InsuranceERM.com

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