Fail to prepare…prepare to fail: Best’s new criteria will mean rating upgrades and downgrades.
One of the lessons I learned when I moved into the world of ratings having been a broker was that the market only really focuses on ratings when the bad news comes out. There are exceptions, but a lot of practitioners simply ignore the vast majority of the commentary and thought leadership coming from the agencies, waiting for something really newsworthy before they sit up and listen.
Nothing wrong with that, except that occasionally my old buddies are blissfully unaware of changes on the horizon that could just have a big impact on their lives in the near future.
“Rating Agency publishes RFC on new criteria” is not a headline that would generally attract that demographic. However, the likely underlying impact could well be more important to them than they realise.
Yesterday saw the release of A.M. Best’s updated draft of their new criteria and capital model, an important day for Litmus and our clients. Today they hold their London seminar and I will be joining my colleagues to hear them run through the detail of these.
Back in 2013, when S&P undertook their fairly radical re-write of their methodology, someone with a crystal ball might have written a headline saying “S&P to change nearly 10% of their ratings within the next 12 months”. That headline might have elicited a stronger response from practitioners, and that is indeed what happened – just by changing their criteria, getting on for 10% of S&P’s ratings changed.
Not because the financial profile of any given re/insurer had changed in any way – just because S&P’s approach had changed.
Earlier this year, A.M. Best announced an RFC on not just their criteria, but also the Universal BCAR capital model (a step further than S&P’s changes). And the revised RFC and BCAR arrived yesterday. For the majority of the market, this will probably register little more than a faint blip on the edges of the radar. Of course, for Litmus, this is major news, and we will be talking about it, examining the RFC, and engaging with Best and our clients on the potential implications.
Yet our sense is that that many re/insurers with A.M. Best ratings haven’t even thought about the impact this might have on their own rating. And it’s only the largest or most sophisticated brokers who appear focused on the implications for their re/insurer clients.
It’s a strange world where the management of a re/insurer and their key professional advisors might be ignoring what could be either a major potential opportunity or an impending crisis.
A key element of this is that Best are required by agency regulation to announce which ratings may be impacted at the point that they switch to the new criteria. This means that they will have had to determine who is impacted before the criteria takes over – so they must be not just testing the criteria but ‘shadow rating’ with it now, ahead of time.
Our advice to our clients has been to address the shape of the new criteria now, to communicate with Best as if it were already in place, and to be considering how their credit profile looks through the new criteria ahead of time; because at some stage in 2017, the new criteria will drive their rating not the old. It reminds me of the old adage ‘to fail to prepare is to prepare to fail’.