Group Ark and Vantage Risk have both received “Preliminary Credit Assessments” (“PCAs”) from A.M. Best. While Litmus believes these provide valuable insight for potential counterparties, brokers and others the agency makes it very clear that a PCA is not the same thing as a rating.
In the attached briefing note Litmus summarises the context for this, the differences between PCAs and ratings and what cedants, brokers and other stakeholders may need to be conscious of when using a PCA.
If you would like to discuss this further, please contact:
Stuart Shipperlee – email@example.com
Peter Hughes – firstname.lastname@example.org
Paul Galpin – email@example.com
Group Ark and Vantage Risk gain A.M. Best PCA’s – how do they differ from ratings?
9th November 2020
The two high profile planned entrants to the reinsurance markets have been assigned “Preliminary Credit Assessments” (“PCAs”) by A.M. Best; at “A pca” and “A- pca”, respectively
While PCAs have much in common with ratings (including the letter scale used), there are also important differences.
In essence, a PCA is an opinion about the rating the carrier would be expected to receive based on what the agency knows about it today (fundamentally reflecting information like capital raising plans and business forecasts). But the agency is not definitively saying that the PCA will be the same as a subsequent rating outcome under any circumstances. Nor is it a complete given that subsequently a rating will actually be issued. The publication of a rating is a separate process that the carrier requests and whose outcome will be determined by a new committee (though it may be something the carrier prospectively engages Best for at the same time as the PCA and, clearly, where a PCA has been widely distributed, for that not to happen would tend to imply some material change in the circumstances or plans of the carrier).
Given that, what is the purpose of Best’s PCAs?
Litmus’ discussions with Best on this suggest they are primarily intended for either “pre-launch” start-ups or existing carriers (and/or their owning groups) that are being substantially transformed. In both cases, the reason for the existence of a PCA rather than a rating is typically that it is being produced ahead of all key aspects of either launch or transformation being in place. Cutting through the jargon, Litmus’ interpretation is that they address the question: “what is the most likely subsequent rating outcome if everything happens as Best has been told?”.
To date wide public disclosure of PCAs has not been common. Instead they have been distributed by the assessed group/carrier on a limited basis agreed with Best. But, as the Group Ark and Vantage Risk assessments demonstrate, that does not have to be the case.
In Litmus’ opinion the most important areas for cedants, brokers and other potential stakeholders to consider about Best’s PCA’s are the following:
They reflect the application of the relevant parts of the full rating methodology and process (including a rating committee) and, like ratings, are a prospective opinion. Hence, like ratings, PCAs come with an “outlook”.
They are not subject to ongoing surveillance by the agency.
The maximum life of the PCA is defined by Best as 180 days after its publication. If, by this point, it has not been replaced by a rating or withdrawn by the assessed carrier, then Best’s PCA criteria states that the agency will withdraw it.
The impact of no surveillance is a fundamental consideration for PCA users. With its ratings Best establishes a clear set of “expectations” across the heads of analysis within its methodology upon which the rating level is predicated. It then monitors the carrier on that basis. A PCA, by contrast, is a one-off opinion. The circumstances that supported that view could change, but – as we understand it – neither the assessed carrier nor the agency have typically made any binding commitment to address that with an updated PCA review. Indeed, again as we understand it, the carrier has no explicit requirement to inform Best of any such change – though, of course, it might very well do so.
Used in an informed way it is easy to see how access to a PCA can be a valuable piece of insight for a new carrier’s – potential – stakeholders. But it seems to us, that the organising principle for that is that the PCA reader is indeed “informed” about the implications of the differences from a rating.
For more information or to discuss further contact:
Stuart Shipperlee firstname.lastname@example.org
Peter Hughes email@example.com
Paul Galpin firstname.lastname@example.org