S&P’s proposed changes to its insurance capital model: the background, what happens next and how the agency handles rating decisions in the meantime

22nd February 2023


S&P launched a Request for Comment (“RfC”) on its insurance capital model in December 2021

The RfC received a huge response. This included some strident criticism of some proposals (made public by those critics) but also a mass of technically detailed comments.  After extending the RfC process twice the agency took the unusual step of withdrawing the original RfC in May 2022 with a view to subsequently launching a new RfC.

At the time of publication of this blog S&P’s latest guidance remains that it is targeting Q1 2023 for the new RfC to be published. That RfC would be expected to reflect changes made where S&P concurs with the feedback. It is also expected to be accompanied by some summarised disclosure of all the material feedback received and how they evaluated it.

In Litmus’ opinion, some of the published critical feedback may have been challenging for S&P to square with some of its stated goals for the methodology changes (for example how feedback on the proposed treatment of 3rd party ratings could be accommodated within the more globally consistent analytical framework that is a core S&P goal). Nonetheless we understand S&P’s specialist analytical team working on the methodology has made progress on all the major issues it is addressing.

Once the new RfC is launched the process will then repeat as normal: our updated 5 step guide to this process has also been published today.

Contrary to the assumption of some rated insurers and others S&P is explicitly not currently assigning ratings with one eye to the arrival of the new methodology and the impact that would have. Rating methodologies have to be deployed as they currently are until a new methodology is formally adopted. Moreover, rating analysts and rating committees could not know what the final changes will be until after all the feedback from the new RfC has been received and reviewed.  Indeed, it is conceptually possible, if not likely, that there could be a third RfC if it were deemed necessary by the agency.

Background and current status

In December 2021 S&P launched a Request for Comment (“RfC”) on changes to its insurance capital model.

Despite the model output being only one part of S&P’s overall prospective capital analysis methodology (which in turn is only a part of its full rating methodology) the RfC received a huge response. While much of this related to technical comments some related to areas of substantial controversy (such as how the agency proposed to handle ratings from 3rd party agencies on assets it does not itself rate).

In May 2022 S&P in essence decided to start the process again, withdrawing the RfC and announcing a new one would follow. Since then, the agency has been reviewing and processing all the comments it had received in order to execute that new RfC in the light of those comments.

This does not, of course, mean that it will adjust its proposals to fit the views of all comments that disagree with, and/or recommend changes to, the original proposals. S&P’s job here is to consider each one and decide whether it agrees or not (and why) and how it will then proceed.  This will include situations where the agency may deem the point valid but not the proposed change (where one has been offered). S&P’s agreement or disagreement with any given RfC response observation, and its rationale for that, is not something it simply decides on privately. Public disclosure of its thinking around all material RfC comments it receives is a key part of this RfC based methodology change process.

In Litmus’ opinion a core challenge for the agency is that some of the most high-profile comments do not easily lend themselves to S&P’s stated key goals in considering changes to its model. In particular it is not easy to square enhancing global consistency with some of the publicly stated concerns around the treatment of 3rd party ratings.

However, we understand that by December 2022 the specialist team of S&P’s analysts working on the methodology development had broadly resolved what the approach to this and other challenging areas of the feedback may be. The ongoing wait now reflects more the sheer volume of comments they need to have processed before publishing a new RfC, and then the agency’s internal wider review and approvals process for those updated proposals.

At the time of publication of this note we understand the agency is still targeting a Q1 2023 release of the new RfC. At that point Litmus understands the agency will also seek to provide transparency around all material changes to the original RfC proposals.

The RfC process will then repeat as normal (see our updated Litmus 5 step Guide to this process, also published 22nd February 2023)

How the agency handles its ratings in the meantime

A common misconception is that the agency’s analysts (and the rating committees that ultimately decide ratings) have one eye on the likely new methodology when making current ratings decisions and/or providing feedback to rated companies.

But that is not the intention (and would be a major concern within the agency if it transpired it was in fact happening).  

In one sense this misconception is not that surprising. S&P ratings, and the underlying methodology that drive those, are forward looking.  Nonetheless the agency is required to rate companies solely based on its current methodology.  Indeed, it explicitly does not want there to be any confusion around what methodology led to any given rating action. Moreover, since proposed rating methodology changes are only that (“proposed”), reflecting those in a rating ahead of their formal adoption would simply tie the agency in knots when the finally adopted changes differ somewhat from the original proposals (which they invariably do).

Thus, for example, the assignment of a “negative outlook” to a rating now is explicitly not something that anticipates how the new methodology may impact that rating when adopted.  Rather it would purely reflect a decision made under the current methodology.

The process from here

Once the new RfC process is published (the start of Step 1 in the updated Litmus guide) there will be a defined period of time for comments to again be provided to the agency. We expect that period to be somewhat longer than the 4 weeks that is common for methodology RfCs, reflecting S&P’s experience to date of the volume of feedback it may get and to allow time for those who provided comments previously to absorb how S&P has handled those.

Once the feedback period closes (the end of Step 1) that initiates a period of review of all comments by the agency and the potential implications for all insurer ratings (Step 2).

Step 3 is what we at Litmus deem “launch date”. This is the moment at which the new capital model methodology is formally adopted (meaning all rating decisions thereafter reflect the new methodology). At the same time three other things happen. First S&P publishes a list of all ratings it considers may be impacted (though without publicly disclosing if the potential impact is likely to be positive or negative). Ratings on this list are deemed to be “Under Criteria Observation” (UCO). Second the agency informs all UCO rating list firms directly, including the potential impact. Thirdly it publishes a document summarising all the RfC feedback it received and how it chose to handle that.

Step 4 then immediately follows launch and involves the agency communicating with all UCO listed firms to gather the information necessary to take their ratings to a rating committee and resolve the UCO status. As the fact of this step highlights, the prior UCO list does not seek to identify all ratings where some form of action will definitely be taken, only those that the agency thinks may result in an action. Previous discussions with S&P suggest that they hope to have most cases on the UCO list resolved within a matter of weeks rather than months. All potential rating committee decisions are conceptually possible for any rating on the UCO list. I.e., no change, an upgrade, a downgrade, a change in outlook, the assignment of a CreditWatch or the removal on an existing CreditWatch.

NB See our companion article also published 22nd February 2023 “S&P’s upcoming second Capital Model RfC: Litmus 5-step guide to how the process will work. UPDATE February 2023″


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