S&P Outlines Rating Criteria For Reinsurance Start-ups

The volatility of the property-casualty market requires the segmentation of risk among reinsurers. With recent catastrophes underscoring this need, Standard & Poor's Rating Service has released a paper outlining its criteria for rating start-up reinsurers.

Ten years ago, the New York-based rating service said it did not rate start-up companies. S&P required five years of operating history before issuing a rating. Today, the service says it rates insurers with a shorter history, as well as new companies, but under strict rating rules.

The criteria, S&P said, require a five year business plan with detailed revenue expectations and other economic data. There must be management discussion about capitalization and the expectation that the insurer's capitalization plan will meet or exceed its rating for five years. Detailed biographies of management and board members are also required.

S&P said that in rating a start-up, it looks for strong, seasoned management and an effective business plan before issuing a rating. Among some new reinsurers it rated shortly after 9/11 were AXIS Specialty and Montpelier Reinsurance Ltd.

The rating service added that while companies may hope the rating will be positive, there is no expectation that an S&P rating will be favorable or unfavorable.

The ratings "were assigned in a manner consistent with our purpose: to deliver fair; independent opinions of the creditworthiness of the entities involved," S&P said.

It noted that new companies can either accept the ratings assigned or keep them confidential.

"Let this be stated emphatically: Standard & Poor's does not assign ratings to facilitate a company's ability to do business," S&P said. "Buyers of insurance and reinsurance must ultimately determine for themselves what level of credit risk is acceptable and, therefore, what an acceptable rating would be for a company with which they would do business."

It noted that some buyers "use a simplistic" approach to use reinsurers rated "A-minus" or higher, but more sophisticated buyers "know that a higher-rated company could be best for longer-tail business, while lower-rated insurers could offer acceptable security for shorter-tail business."

Many of the new startups are focused on property catastrophe reinsurance, "a highly commoditized business line with a short tail," and are looking to take advantage of an anticipated hard market, said S&P. However, there is significant volatility in this market "and the current favorable pricing is likely to be a short-term phenomenon." The "A" rating range indicates long-term financial strength, "which cannot automatically be inferred in a brand new company focused only on property catastrophe business.

"Although a few of the current crop of startups might qualify for a rating at that level, the majority would most likely receive lower ratings," said S&P.