20th March 2023

On Tuesday 14th March S&P issued the following update to the Request for Comment (RfC) process around changes to its insurance capital model. For the background to the RfC’s current status see our recent blog here.

“We have completed our review of the substantial volume of feedback received on the 2021 RFC, and we are in the process of finalizing the new RFC, which we expect to publish in the second quarter of this year. We also plan to publish a capital model prototype with our revised proposal to facilitate market participant feedback”.

The first sentence on timing we cover at the end of this note. Whilst the timing change doesn’t seem particularly noteworthy, the second sentence (which we have highlighted in bold) very definitely is.

The planned issuance of a prototype model

When the initial RfC was released the lack of a model prototype being made available to rated carriers caused very considerable frustration for some.

How, they asked, could they effectively provide feedback on the raft of individual model change proposals without being able to see how those come together in an S&P constructed model, and, hence, how that impacted their model outcome vs the existing model.

In our discussions with S&P the agency’s main response to that concern was that it was not requesting feedback on the potential outcome for any given rated firm; rather the exercise focused on feedback on the logic of the proposals.

Simply put the agency knew that if it released a prototype model much of the feedback might be driven by whether the outcome was apparently positive or negative for responding firms, instead of reflecting objective feedback around the proposals themselves. Moreover, changes to the model would not be reflected in S&P rating outcomes in isolation. For example, the separate Risk Exposure assessment made by the agency’s analysts on each rated firm (which acts to modify the model outcome), would be made in the light of whatever the finalised new model changes are. Consequently, a false impression of what the proposed changes might mean for any given rated firm could have arisen.

So, what has led S&P to change its approach and provide a prototype?

Our discussion with the agency since Tuesday’s update suggests to us that it is a combination of the following:

  • The receipt of so much feedback on the original proposals in the absence of a prototype means they are less concerned that provision of a prototype now might unduly distort the feedback.
  • The demand from rated firms for a prototype was sufficiently high that the agency concluded it would make sense to release it now. Indeed, the lack of a prototype was one likely reason the agency found that it needed to issue clarifications and examples about its proposals during the first round of the RfC period.

The further delay in the publication of the updated RfC

As we had noted in the above referenced blog, S&P has completed its review of all the feedback. While not explicitly stated, we take it that the agency has also determined how to incorporate or respond to that feedback, although a wild card could be around any wider internal debate within the agency as the S&P insurance group’s proposals go through the necessary sign-off and approvals process.

While S&P would clearly like to have this process done and dusted it consistantly reiterates that it does not have a hard deadline and it will extend the process until such time as it feels it has done its job as fully and effectively as it can.

Therefore, while the new guidance would seem to suggest that a Q2 release is highly probable (and a fairly early Q2 release is still possible), it is not a given.

Crucially, whenever that release happens (now to be accompanied by the prototype model) it is just the start (restart) of the RfC process itself. To understand how that process will work see our 5-step guide here.


Stuart Shipperlee        stuartshipperlee@litmusanalysis.com

Peter Hughes              peterhughes@litmusanalysis.com

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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 relationships with the rating agencies), cedant analysis, re/insurer selection, market analysis, peer reviews & benchmarking and market security/counterparty credit management (including the InsurTech application LitmusQ). 

The team of consultant analysts all have a 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.

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