SCR is not a replacement for a rating, agency contends

Some market participants have argued that there will be less need for rating agencies following the introduction of Solvency II because the directive’s solvency capital requirement (SCR) will provide a benchmark of insurers’ financial strength.

However, Miles Trotter, general manager – analytics at AM Best argues that there are fundamental differences between the SCR and financial strength ratings, which should ensure the latter survive.

“The SCR is a meaningful measure but I doubt it will replace our ratings,” Trotter said at AM Best’s press conference at the Monte Carlo Rendez-vous.

Trotter pointed out that rating agencies and regulators have different aims with their measures. Regulators control access to the market through authorisation, while ratings differentiate between insurers that have been authorised.

In addition, the SCR is a historic, point in time measure, while ratings are forward-looking. Trotter said they incorporate expected performance, enterprise risk management, financial flexibility and other factors affecting future financial strength.

Ratings are also designed to be more publicly visible than regulators’ solvency requirements. “Rating agencies have access to management and confidential information like regulators but our emphasis is on getting the results out into the public domain,” Trotter said.

Also, similar measures in other markets have not sounded the death-knell for rating agencies. Trotter pointed out that insurers’ risk-based capital numbers have been available in the US since the early 1990s. “This has not had an impact on the demand for ratings,” he said.