Fitch Ratings said it is considering incorporating the strength of an insurer's regulatory scheme into the methodology it uses to rate the financial health of insurance companies.
Fitch said it is seeking feedback from interested parties no later than Jan. 31, 2006. A final methodology report that incorporates any relevant market feedback is expected to be published in first-quarter 2006, Fitch said.
At its core, the agency explained, the new methodology aims to better define how the two most significant drivers of credit risk–the probability of default and recovery given a default–impact ratings, and how the two are weighted in the context of "expected loss."
The new methodology incorporating a regulatory environment that better protects policyholder interests will create two new ratings, Fitch Ratings said.
In general, Fitch Ratings said the new ratings will lead to more favorable issuer financial strength ratings, such as issuer default and recovery ratings, at the insurance company level, but lower ratings at the holding company level.
In contrast, Fitch Ratings officials said, "weak regulatory environments void of policyholder protection measures tend to result in the compression of all ratings of a given insurance organization–both at the insurance company and holding company–closer to the same level, notably placing downward pressure on the IFS rating."
Fitch said it plans to roll out new ratings based on the additional criteria to the insurance industry in early 2006.
The firm said it will also include revisions in the manner in which various ratings of a global insurance organization are set, or "notched," relative to each other.
Typical insurance industry ratings include the Insurer Financial Strength (IFS) rating, which measures the ability to meet policyholder obligations, as well as ratings assigned to various debt and preferred stock issuances at either the parent holding company or insurance company level, Fitch explained.
Under the new scheme, Fitch Ratings said it has classified several countries' regulatory regimes as either "Strong," "Moderate" or "Weak" with respect to those factors considered in its new rating methodology.
Specifically, the classifications focused on the strength of the regulator's capital regime and the priority afforded policyholders over other creditors in a liquidation, Fitch Ratings said.
Examples of "Strong" regulatory regimes in this context include the United States and European Union (EU) oversight of primary insurance companies; "Moderate" regimes include Bermuda and nonlife insurance regulation in Australia and Japan; and "Weak" regimes include several offshore locales including Barbados and the Cayman Islands.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.