AM Best expects the NAIC's reinsurance collateral proposals to have a limited impact on property/casualty companies

AM Best has reviewed the potential impact of the NAIC’s reinsurance evaluation office proposal that will grant credit for ceded reinsurance.

As a result of that review, AM Best expects that there are only a handful of US property/casualty companies that will see a material negative impact on their Best’s Capital Adequacy Ratio (BCAR) if collateral for reinsurance recoverables was changed.

This review was conducted by recalculating each individual company’s BCAR after removing all of the credit for collateral currently included in the capital model.

Of the 895 property/casualty ratings assigned by AM Best within the United States, only 45 organisations, or 5% of the US property/casualty ratings, would see a material change in their BCAR score. Those companies that have the greatest chance of seeing a material impact from the proposal have ceded leverage of greater than 2.0 or have sizable recoveries from unrated foreign reinsurers.

A material impact was defined as lowering BCAR by more than five points and resulting in a BCAR below 175. This criteria was used for the sake of this study. A BCAR score of 175 typically can support AM Best’s highest ratings depending on a company’s operating performance and business profile. Accordingly, many companies considered to face a material impact as defined in this study may face little actual rating pressure.