Best's Rating Methodology
Our rating process involves a comprehensive quantitative and qualitative
analysis of a company's balance sheet strength, operating performance and
business profile. This includes comparisons to peers and industry standards
as well as assessments of an insurer's operating plans, philosophy and
management. Read Best's Rating Scale and Related Definitions for complete
details on Financial Strength
or Issuer Credit and Debt
Ratings.
Special Notice: Updated
Terrorism-related SRQ Questions In an effort to provide more time to all
parties associated with the completion of A.M. Best's Supplemental Rating
Questionnaire (SRQ), this subset of updated terrorism related questions is
available ahead of the February 2008 release. For more information, or if you
have questions, please contact your analyst.
Financial Strength Methodologies The following methodologies offer
an explanation of Best's Rating System and Procedures for assigning
financial strength ratings. They cover Industry/Regional specific topics in
detail such as the Objective of Best's Rating System, Best's Rating Scale, the
Release and Assignment of Best's Ratings, Definitions and more.
Other Methodologies Additional relevant
methodologies published by A.M. Best are listed below. Please contact us if you have questions regarding
these publications or cannot locate information on a specific
topic.
- Best's
Impairment Rate and Rating Transition Study - 1977 to 2007 (April 21, 2008) - This is the fifth study conducted by A.M.
Best Co. on the long-term impairment of A.M. Best-related, U.S.-domiciled
insurance companies.
- Update to
BCAR for Life & Health Insurers (April 3, 2008) -
A.M. Best has modified its Best's Capital Adequacy Ratio model for life and
health insurers effective with year-end 2007 to enhance its accuracy in
measuring balance sheet strength and operating risk.
- Life Settlement
Securitization (March 24, 2008) - Read how A.M. Best
Co. rates securities backed by life settlements (i.e. insurance policies bought
in the secondary market).
- Rating
Protected Cell Companies (March 4, 2008) - The purpose of
this special report is to discuss how existing captive methodologies or other
A.M. Best rating methodologies would apply to the rating analysis of some forms
of protected cell companies.
- Takaful
(Shari'a Compliant) Insurance Companies (February 11, 2008) -
This report highlights the main issues arising when applying A.M. Best's rating
methodology to takaful insurance companies. Takaful is clearly on the rise,
particularly in the Middle East and Malaysia, but A.M. Best's main principles
remain unchanged, regardless of the type of company analyzed.
- Risk
Management and the Rating Process for Insurance Companies
(January 25, 2008) - In this paper, A.M. Best explores the key risk
management trends in the insurance industry and describes how risk management
impacts the overall rating process and the development of capital
requirements.
- Rating
Natural Catastrophe Bonds (January 22, 2008) - Read
our Quick Reference for a concise overview of Best's Rating Methodology on these
structured debt instruments that transfer risks associated with
low-frequency/high-severity events to investors.
- BCAR For
Title Insurance Companies (December 6, 2007) - A.M. Best's
interactive rating process for title insurance companies is intended to provide
an opinion on a company's ability to meet its ongoing obligations to
policyholders. The evaluation of a company's financial strength is based on an
in-depth analysis of its balance sheet strength, operating performance and
business profile.
- Best's Idealized Default
Matrix (December 5, 2007) - provides the default table
used by A.M. Best's Structured Finance Group for rating securities in structured
transactions.
- Rating
European Mutual Insurers (September 3, 2007) - This report
outlines how A.M. Best applies its rating methodology to European mutual
insurance companies. Throughout this methodology, the term "mutuals" will
indicate any insurance company without capital stock and for which the ultimate
control is vested in the policyholders.
- Securitization
of Reinsurance Recoverables (August 20, 2007) - Read A.M.
Best's methodology on how it rates securities collateralized by reinsurance
obligations.
- Evaluating
Health-Care Systems (June 19, 2007) - This report describes
A.M. Best's methodology to evaluate a nonprofit health-care system's ("the
system") overall creditworthiness, as well as the ability of the system to
financially and strategically support its owned or affiliated health and captive
insurance company(ies) and to potentially enhance the stand-alone issuer credit
and financial strength ratings of these regulated subsidiaries.
- Assigning
Public Data Ratings to U.K. Companies (May 21, 2007) - The
purpose of this report is to provide transparency regarding A.M. Best Co.'s
criteria for assigning Public Data Ratings to both life and non-life companies
in the United Kingdom.
- A.M. Best's
Liquidity Model for U.S. Life Insurers (April 20, 2007) - As
part of its standard analytical review of all companies, A.M. Best has detailed
discussions about management of liquidity risk. A.M. Best believes that the
measurement of a company's liquidity is one of the most important factors in
determining a life insurer's financial strength.
- Canadian
Public Data Ratings, Property/Casualty (March 26, 2007) -
A.M. Best Co. has been assigning Public Data Ratings to Canadian property and
casualty companies since 2000. While the Canadian property and casualty industry
has been more stable than the U.S. industry, there still have been some issues
that have challenged the financial strength of individual companies.
- A.M. Best's
Title Insurance Rating Methodology (March 19, 2007) - A.M.
Best's rating process for title insurance companies is intended to evaluate a
company's ability to meet its ongoing obligations to policyholders. The criteria
to evaluate a company are based on in-depth analysis of both quantitative and
qualitative measures, including balance-sheet strength, operating performance
and business profile.
- Understanding
Universal BCAR - A.M. Best's Capital Adequacy Ratio for Insurers
(March 19, 2007) - The purpose of this report is to document the
existing criteria and methodology related to A.M. Best's Universal BCAR model.
The objective of A.M. Best's rating system is to provide an opinion of an
insurer's financial strength and ability to meet ongoing obligations to
policyholders.
- Rating Methodology for Banks (February 27,
2007) - The bank rating methodology outlines the principles and
analytical criteria underpinning A.M. Best's rating opinion on a bank, its
parent holding company and other affiliated banking entities as may be necessary
as part of A.M. Best's ratings on a banking group.
- Rating
Implications of Recent Florida Legislation (February 26,
2007) - In response to the recently passed insurance legislation in
Florida and in the ongoing effort to maintain rating transparency, A.M. Best Co.
comments on both the near-term and longer-term impact of this legislation on the
financial strength ratings of primary and reinsurance companies.
- Tail Risk
and the BCAR (February 26, 2007) - Read our Quick Reference
on how "Tail Risk" associated with sidecars is incorporated in the assessment of
the sponsor's Financial Strength Rating (FSR) and how it is reflected in the
BCAR calculation.
- BCAR for Life and
Health Insurers - Model Update 2006 (February 12, 2007) - In
determining a company's ability to meet its current and ongoing obligations to
policyholders, the most important area to evaluate is its balance sheet
strength, since it is the foundation for policyholder security. One of the key
tools used in evaluating balance sheet strength is Best's Capital Adequacy Ratio
(BCAR) model, which provides a quantitative measure of the risks inherent in a
company's investment and insurance profile relative to its statutory capital and
surplus.
- Assigning
Public Data Ratings to Health Insurance Companies (February 7,
2007) - The purpose of this report is to provide transparency regarding
A.M. Best Co.'s criteria for assigning Public Data Ratings to health insurance
companies, including health maintenance organizations, Blue Cross and Blue
Shield plans and Delta Dental Plans.
- Frequently
Asked Questions: Rating Start Up Reinsurers (November 15,
2006) - In response to the many questions we have received
regarding the rating of start-up reinsurers, the following Frequently Asked
Questions report has been prepared. This FAQ should be used in conjunction with
other A.M. Best sources of information on start-ups.
- Review of BCAR
Treatment for XXX Captives (November 13, 2006) - Over the past
several years, direct writers have been searching for effective capital
solutions to fund reserves for level premium term products subject to the
reserve requirements of the Valuation of Life Insurance Policies Model
Regulation, more commonly known as Regulation XXX.
- A.M.
Best's Perspective on Operating Leverage (November 3, 2006) -
In forming an overall opinion of a company's balance sheet strength --- the most
important area in determining a company's ability to meet its current and
ongoing obligations to policyholders --- A.M. Best Co. reviews the
organization's financial leverage
- Assessing the
"Tail Risk" of Sidecars (October 9, 2006) - Read how
A.M. Best determines the amount of "tail risk" that is associated with sidecars.
Tail risk is the risk that will be borne by the ceding insurer/reinsurer if the
sidecar is not sufficiently capitalized.
- Gauging the
Basis Risk of Catastrophe Bonds (September 25, 2006) -
Read how A.M. Best determines the basis risk inherent in parametric catastrophe
bonds. Read our Quick Reference, Rating Natural
Catastrophe Bonds, for a concise overview of Best's Rating Methodology on
these structured debt instruments.
Rating
Health Insurance Companies (September 8, 2006) - The
purpose of this report is to provide transparency regarding A.M. Best Co.'s
criteria for assigning financial strength ratings (FSR) to health insurance
carriers, including traditional life/health insurance companies, health
maintenance organizations (HMOs) and Blue Cross and Blue Shield plans. This
methodology also updates A.M. Best's previously published health-care rating
methodology to reflect changes in the marketplace.
Rating
Sidecars (June 28, 2006) - Read our Quick Reference
for a concise overview of Best's Rating Methodology on property and casualty
"sidecars" and their use as an attractive alternative to traditional
retrocession.
Catastrophe
Risk Management Incorporated Within Rating Analysis (May 12,
2006) - A.M. The tumultuous storm seasons of 2004 and 2005 have
heightened the importance of catastrophe risk management. Most companies had
modeled their catastrophe exposures, but some didn't consider the quality of the
data used in the model or the parameters of the model that can greatly change
the output.
Catastrophe
Analysis in A.M. Best Ratings (April 12, 2006) - A.M.
Best considers catastrophic loss, both natural and man-made, to be the No.1
threat to the financial strength and credit quality of property and casualty
insurers due to the significant, rapid and unexpected impact that can
occur.
A.M. Best
Comments on Enterprise Risk Management and Capital Models (February 3, 2006) - Enterprise risk management is the broad
description of the further integration of risk management across an
organization's operations, along with greater sophistication in the modeling of
the organization's risk.
A.M.
Best's Rating Methodology for Captive Insurance Companies (November 2005) - Read how the monitoring of current
developments as they may affect a captive company are critical to the value and
efficacy of the A.M. Best rating process
Rating
Surplus Note And Insurance Trust-Preferred CDOs (July 25,
2005) - Read how A.M. Best rates securities backed by Surplus Notes and
Insurance Trust-Preferreds (Securitization of surplus notes and
insurance trust-preferreds).
Analyzing
Finance Companies (June 3, 2005) - The analytical
framework for assessing finance companies highlights special issues particular
to the finance industry, according to A.M. Best Co.'s latest rating methodology,
Analyzing Finance Companies.
Equity
Credit for Hybrid Securities (April 4, 2005) - A.M.
Best has released its methodology for the treatment of equity credit for hybrid
securities issued by insurance-related entities, which highlights the importance
of debt-service capabilities.
Understanding
BCAR for Canadian Property/Casualty Insurers (April 4,
2005) - A.M. Best Co. has released a rating methodology addressing the
quantitative and qualitative factors affecting ratings of Canadian
property/casualty companies.
Analyzing
Commercial Banking Operations (March 28, 2005) -
Globally, increasing numbers of banks and insurers have expanded operations into
each other's industry. Based on this growing trend, A.M. Best Co. has released a
methodology for evaluating the financial health of the banking operations of
insurance-related enterprises.
Rating Members
of Insurance Groups (January 31, 2005) - read how the
dynamic within insurance groups and the relationships between affiliates
continues to evolve.
Evaluating Health-Care
Systems (January 24, 2005) - A.M. Best Co. evaluates
the ability of not-for-profit U.S. hospitals and health-care systems to support
their health maintenance organizations and captive insurance company
subsidiaries.
A.M. Best's Ratings
& the Treatment of Debt (October 11, 2004) -
provides specific information outlining the relationship between Best's
Financial Strength Ratings and Best's Debt Ratings.
Rating Funding
Agreement-Backed Securities (October 4, 2004) - Read
how A.M. Best Co. approaches the rating of securities and related programs that
are backed by funding agreements issued by U.S. life insurers.
Rating New
Company Formations (March 8, 2004) - read our rating
methodology for new insurance and reinsurance companies as A.M. Best strives to
meet the demand for financial information on these and other risk-assuming
vehicles.
Understanding BCAR for
Life/Health (February 9, 2004) - read what's behind
Best's Capital Adequacy Ratio for Life/Health insurers and its implication for
ratings.
Rating Closed Block
Monetizations (December 15, 2003) - find out how and
why some publicly traded life insurance companies are exploring this
option.
Understanding BCAR
(November 24, 2003) - read what's behind Best's Capital
Adequacy Ratio for Property/Casualty insurers and its implication for
ratings.
Country Risk Methodology
(November 18, 2002) - find out how A.M.
Best uses country risk analysis to determine how the factors outside an
insurer's control affect its ability to meet its obligations to its
policyholders.
A.M. Best Rating
Methodology for Lloyds Syndicates (November 11, 2001)
- provides an overview for Best's Rating of Lloyd's and helps in understanding
the unique structure of Lloyd's.
Commercial Paper
Methodology (August, 2001) - read our analysis on the
rating process behind short-term debt obligations.
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