While Fitch and Standard & Poor's made announcements about revisions to their capital models over the past year, competitors Moody's Investors Service and A.M. Best did not sit silently watching.

In a special comment released by Moody's in June, analysts in New York and London acknowledged that insurers internally were developing models known as economic capital models.

The report said that while no immediate ratings implications are forthcoming, sophisticated models that are fully embedded in the financial management of a large insurance group could be viewed positively at some point in the future.

In addition to considering the degree of sophistication and how well embedded the model is in the financial management of a firm, to garner positive ratings implications Moody's said it would expect a model "to be a clearly demonstrable part of the day-to-day risk management of the business and highly influential on any capital-related decisions."

The report contains a list of a dozen characteristics that would prompt Moody's to have high confidence in model outputs.

Moody's, which developed a U.S. property-casualty risk-adjusted capital model with dynamically modeled components in 2004, cast a vote against the development of a single global rating agency economic capital model in its June report. It noted that such a model would oversimplify the "particular circumstances of the business being considered."

Highlighting complexities of insurance assets and liabilities, and the wide range of regulatory and accounting systems to which insurers are exposed, Moody's said that even if it were possible to develop a global rating agency model, "the majority of the discussion would revolve around differences between the Moody's result and the company's own result rather than address the really substantive analytical issues."

In February, A.M. Best announced that while it will continue to use its Best's Capital Adequacy Ratio as a consistent standard for assessing capitalization, going forward it will also recognize external output from company models. The amount of consideration will vary depending on Best's view of the company's overall risk-management program, model assumptions and model quality, the Oldwick, N.J.-based firm said, adding that "there is no one formula in determining the amount of credibility afforded the company's capital model."

Special Reports /

Moody's, A.M. Best To Consider Insurer Economic Capital Models

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