Litmus’ 5 step guide to how S&P’s new insurance capital model criteria will be implemented.

S&P’s prior disclosure on the potential impact on ratings of its proposed capital model criteria changes suggests some rating upgrades and downgrades may occur as a result.

Given the potential significance we hope our guide is of help to S&P rated insurers, reinsurers, and rating users alike.

In our companion Litmus Primer (which can be found here) we describe the background to, and status of, a specific aspect of the process in more depth: the issuance of a list of ratings that the agency will place “Under Criteria Observation” (“UCO”):

  • The publication of the UCO list (see Step 3 of this guide) is part of S&P’s disclosure and transparency process, indicating to rating users that it is reviewing the ratings on the list for a potential change.
  • We understand S&P considers that it is not able to give rated insurers and reinsurers advance notice that their ratings will be designated as UCO. Instead, they will be told at the time of general publication of the list.
  • The published UCO list will not disclose whether the potential changes are positive or negative.
  • (Re)insurers with UCO designated ratings will be advised of the potential impact on their own ratings but, typically, only sometime after the UCO designations have been published.
  • In particular this communication with the (re)insurer will take place once the agency’s analysts have gathered and reviewed information from the (re)insurer to populate the new model and have conducted their analysis sufficiently such that they can effectively inform the (re)insurer of the context and details the UCO resolution rating committee will be looking at.
  • While we expect some UCO listed ratings may well be reviewed and a rating committee decision reached and published within a matter of weeks, the agency has noted to Litmus that it has up to six months to complete and publish its reviews.

Purpose of this guide update:

This update has been issued primarily to reflect an update in Litmus’ understanding of S&P’s timing of its communication with those insurers and reinsurers with UCO designated ratings as to the potential rating change direction the UCO designation relates to (see 5th bullet above).


S&P’s Request for Comment (“RfC”) process on its proposed changes to its capital model criteria finally ended on 14th July 2023, 20 months after it began. The first iteration of the proposals, published in December 2021, created a huge response for the agency and, for some elements of the proposals, generated significant controversy.

The second RfC iteration, published in May 2023, appears to have been rather more routine, even though the accompanying publication of a prototype model, reflecting the status of S&P’s proposals at that point, will have been a fundamental, additional point of focus for many rated (re)insurers.

S&P provided updated guidance with the May 2023 RfC release indicating that its testing suggested 10% of ratings could change (be upgraded or downgraded) as a result of its proposals once they are adopted (see Steps 3 and 4). Litmus understands the 10% number was an estimate of the likely volume of rating changes and was not intended by the agency to indicate a maximum number it could envisage.

The agency has also said that it expects more upgrades than downgrades and that “the majority of” changes would be by one rating notch.

A wild card for the final outcome of ratings facing a downgrade risk (i.e., reflecting a material weakening in the capital model outcome) is whether the impacted (re)insurers wish to and are able to react (see Step 5 of our guide).  Since S&P’s ratings are forward looking, a (re)insurer might be able to demonstrate credible future capital management plans to the agency that mitigate the model change impact.

However, (re)insurers might well need to develop any mitigation plan well in advance of hearing from S&P that the UCO designation reflects the potential for a downgrade since the time between that being communicated by S&P, and the holding of the UCO resolution rating committee, may not be that long.

Moreover, depending on the current rating level and the wider context for market use of their ratings, some (re)insurers may not choose to seek to mitigate the outcome, via, for example, capital management actions, even if they are able to.

5 step guide

Step 1:  Request for Comment Process

COMPLETED July 14th, 2023.

Step 2: S&P’s review of the comments

S&P is currently reviewing the May 2023 RfC replies and making decisions on any changes to its proposals, before finalising the criteria, the new model, some associated documentation, and the list of ratings to be designated as UCO.

Step 3: Launch Day (Litmus’ term) – S&P formally adopts the new methodology.

The new model criteria is formally adopted by the agency and published, along with the finalised new capital model.

This is a fundamental point in time as, prior to its formal adoption, the agency was not allowed to anticipate the capital model criteria changes in any of its rating decisions. Conversely, from the moment the new model criteria is adopted, it wholly replaces the prior criteria in rating committee discussions and decisions.

In addition:  

  • The agency publishes the “Under Criteria Observation” (“UCO”) list of all ratings S&P believes may be changed by the new criteria (although this published list will not show what that change might be for any given rating).
  • S&P advises companies on the UCO list that their ratings are now being reviewed. This is the first time the agency will have advised potentially impacted companies that some or all of their rating(s) may change due to the new criteria.
  • S&P publishes summarised details of the material RfC feedback received, highlighting where and why it made changes following consideration of the comments provided, and also explaining why some comments received did not result in any changes to the proposed criteria.

Step 4: UCO rating list resolution and reviews of non-UCO (re)insurer credit profiles

UCO Ratings

The agency now starts communicating with rated firms on the UCO list in the light of the new model criteria and, potentially, other elements of how the agency applies its ratings framework where the model criteria changes could impact S&P’s assessment.

In many cases this is likely to lead to material exchanges of information, insight, and perspective between the agency and (re)insurers with UCO ratings.

We expect the agency to be able to resolve the status of some UCO ratings within weeks, but in theory the agency has up to 6 months to resolve all UCO cases.

Prior to the UCO resolution rating committee, the S&P analysts will communicate to the (re)insurer whether the UCO designations indicate potential upgrades or downgrades. For any (re)insurer we understand this will not happen until the S&P analysts have sufficient insight to explain and clarify to the rated (re)insurer what the committee consideration would materially relate to. This communication could therefore happen not that long before the rating committee sits to make its decision.

For each of the (re)insurers with ratings on the UCO list, Step 4 ends with the agency publishing one of the following for each rating as decided by a rating committee: an affirmation of the current rating and outlook; a changed rating and/or outlook; the rating being placed on CreditWatch or, if it is already on CreditWatch, whether it remains so.

Non-UCO Ratings

The last time S&P changed part of its insurance rating methodology and, hence, issued a UCO list was July 1st, 2019.

At that point it also announced that it expected to review the credit rationales for “those companies not potentially affected (by the criteria change) but in scope – within approximately for months”.  This description in essence meant (re)insurers that did not have UCO designated ratings.

Clearly the above approach meant non-UCO related reviews taking place well ahead of the normal, annual, rating surveillance cycle for many (re)insurers.

S&P has not yet published its intended approach this time around. But, for the following reasons, a repeat of the 2019 process (or similar) seems reasonably likely to us.

If so we would presume that S&P will be considering the scores (assessments) it assigns across all the heads of analysis within its rating methodology that could be directly or indirectly impacted by the new model criteria.  For example, while the agency has estimated that 10% of its ratings could change it also estimates that 30% of its Capital & Earnings assessments could change.

We would also expect this to include reviews of “rating triggers*”. In S&P terminology, rating triggers are the issues it highlights for each rating that would be most likely to lead to a rating change.  These do not mean the agency believes that change is itself likely to happen; rather they are part of the agency’s process for being transparent about those factors that could be the cause of a rating change were one to take place.

*The term “rating trigger” is sometimes used in policy wordings relating to permitted changes to the policy’s terms if a rating changes (e.g., a carrier’s rating being downgraded below some defined minimum level). The use of the same terminology is a coincidence.

Step 5:  The context for remedial action if it is to be credited in S&P’s UCO ratings resolution.

S&P’s ratings are forward looking. For example, its base-case perspective on risk adjusted capital strength typically reflects its forecast of capital model outcomes for the year-end two years beyond the current year. Within the capital part of its analysis, it is the ongoing, sustainable, capital position on which the agency focuses most.

The agency is, therefore, routinely considering how management actions, market conditions, prospective retained earnings etc. could impact that prospective capital position.

To the extent a firm’s rating(s) could be negatively impacted by the adoption of the new methodology, its management may choose to take remedial action to restore the position. Options might include raising capital, de-risking the investment portfolio, ceding more to reinsurers etc.

However, for these to be factored in by the agency at the time of the UCO resolution, in the agency’s eyes they will need to be highly credible. Expected timeframes will matter but may vary depending on the nature of the action.  A capital raise, for example, might need to be deemed fully deliverable within a year or less.

Even if the agency considers the plan is both sufficiently credible and sustainably restorative of the capital position, such that a downgrade is not warranted, it may still choose to act on the rating outlook or consider a CreditWatch if it feels there is enough uncertainty to warrant either of these options.

The agency will also consider whether the proposed actions impact other assessments it makes on the (re)insurer’s credit profile across its insurance ratings framework, prospective operating performance and/or reinsurance dependency being examples.





Stuart Shipperlee    

Peter Hughes           

About Litmus

Litmus Analysis specialises in helping the re/insurance industry understand credit risk, the ratings agencies, and the financial analysis of (re)insurers.  Its main areas of work are Ratings Advisory (helping companies manage their communications with the rating agencies), cedant analysis, re/insurer selection and stress-testing, market analysis, peer reviews & benchmarking and market security/counterparty credit risk management (including via the InsurTech application LitmusQ). 

The team of consultant analysts all have a senior rating agency and/or broker market security background and includes the former heads of S&P Ratings Europe (insurance), A.M. Best EMEA and A.M. Best Asia Pacific.

For more information about Litmus and our range of services contact us at Litmus Analysis

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