Standard & Poor's Ratings Services released what it called a "comprehensive enhancement" of its capital models for life, annuity, property-casualty, health insurance and reinsurance companies worldwide aimed at better capturing changes over the course of a year.
In a report put out earlier this month and amended today, the agency said it aims to "capture the present value of expected economic losses experienced over an annual period to a degree of certainty that is commensurate with the rating."
The framework also includes regional risk factors developed to reflect features unique in the local market, the report noted.
From the initial request for comment release in November 2006 until the end of the comment period in February 2007, the agency received more than 200 responses from market constituents worldwide.
One of the major framework changes is the expression of capital adequacy for each rating level, and redundancy or deficiency, which can be quantified against the target capital. The expression uses confidence levels for each rating category (triple-A, double-A, A, triple-B), which themselves are based on observed five-year default rates.
The output is expressed as a dollar amount above the base confidence level for the particular rating, S&P said.
Another major change incorporated in the enhancement is that, for the first time ever, S&P said it will provide an explicit diversification credit in the capital model across sectors and between product type (non-life) and risk type (life) as well as for investment risks. No explicit credit is currently given for the geographic spread of business.
The enhanced model's implementation began last Thursday.
Both the enhanced capital model and the current model will run in parallel through the end of 2007. "We will constantly assess the efficacy of the results and fine-tune where necessary," S&P said.
In early 2008, the firm said, the enhanced capital model is expected to become the sole tool to assess capital adequacy in its interactive ratings process.
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