Limited Impact Seen From Collateral Change

A.M. Best Co. expects only a few U.S. property-casualty companies will see a material negative impact on their Best's Capital Adequacy Ratio (BCAR) if collateral requirements for reinsurance recoverables are changed.

The National Association of Insurance Commissioners is currently reviewing a proposal to modify the 100 percent collateral rule for all alien reinsurers in favor of imposing such charges based on standards administered by a new Reinsurance Evaluation Office.

Best conducted its review by recalculating each individual company's BCAR after removing all of the credit for collateral currently included in the capital model.

A material impact was defined as lowering BCAR by more than five points and resulting in a BCAR below 175. This criteria was used for the sake of the study. A BCAR score of 175 typically can support A.M. Best's highest ratings depending on a company's operating performance and business profile.

The rating firm said many companies considered to face a material impact as defined in this study may face little actual rating pressure.

There also may be a few companies that currently maintain marginal capitalization for their rating. For those companies, less collateral could be material to their rating despite a small change in BCAR that is acceptable in this study.

The Best report said there are likely other, more important issues that impact the view of the capitalization of those companies.

Of the 895 property-casualty ratings assigned by A.M. Best within the United States, only 45 organizations, or 5 percent of the U.S. property-casualty ratings, would see a material change in their BCAR score. Those companies that have the greatest chance of seeing a material impact from the proposal have ceded leverage of greater than 2.0 or have sizable recoveries from unrated foreign reinsurers, Best said.