DBRS Releases New Global Insurance Methodology

DBRS Limited (DBRS) has today released its “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2015)” after a public request for comment period. The new methodology considers several factors, including the increased complexity of insurance risks and regulation; major shifts and dynamics in competition across the diverse financial services space; regulatory environment evolution, particularly in respect of evolving views on the definitions of capital; and the growing global reach of internationally active insurance companies.

The methodology, which places a high emphasis on the prevailing regulatory and operating environments, is underpinned by the DBRS core rating philosophy of “rating through the cycle.” The unique approach outlined in the new methodology incorporates a transparent approach to the notching between the holding company and operating company ratings, as well as a clear qualitative and quantitative approach to assessing franchise strength, while incorporating other key analytical considerations, including earnings ability, liquidity, risk profile, capitalization and asset quality.

In addition, the methodology applies a financial strength rating (FSR) scale denoting the risk of nonpayment for policyholders and for counterparty credit assessments. This FSR scale adds value for market participants by improving the global comparability of DBRS ratings by using a similar scale to the long-term obligations scale. The DBRS claims-paying ability scale has been withdrawn and the FSR scale has been fully implemented. The new FSR scale is posted on DBRS’s website.

The methodology consolidates the existing separate methodologies, both published in January 2015, for Canadian life and property & casualty insurers. These methodologies are now archived methodologies on DBRS’s website. Having a single methodology for these two industries provides a common foundation for analyzing insurance companies, while still addressing the notable differences between them. Moreover, this common foundation can be used to rate multi-line insurers and address other types of insurance companies in the future.

The methodology specifically addresses the rating of insurance holding companies by taking into consideration the unique aspects of these parent companies and the operating groups that they control, considering various characteristics, including their diversified holdings, capital structure and cash flows.

Given an existing FSR at the operating company, the parent holding company would typically be notched down two notches from this FSR to reflect structural subordination under this new methodology. Ratings of a holding company’s debt and preferred shares depend on the FSR at its operating company, which then serves as the anchor point for the rating of the various capital instruments at the operating company and the holding company. Existing insurance company ratings and related ratings of insurance holding companies were revised.

DBRS took into consideration comments from the public received during the 30-day comment period. DBRS’s review of these comments considered the issues raised and appreciated the effort and thoughtfulness of the contributors, but determined that no changes to the draft methodology were warranted. The methodology has been republished without change, except that the material that was previously Appendix I (i.e., the DBRS FSR scale) is now posted to the ratings scale section of DBRS’s website.

Note:
DBRS criteria and methodologies are publicly available on its website www.dbrs.com under Methodologies.