S&P proposes insurance capital model update

NEW YORK--Standard & Poor's Corp. on Tuesday released plans for an updated insurance capital model to assess global life, health, property/casualty and reinsurance companies.

According to New York-based S&P, capital adequacy has historically been one component in a nine-part framework that S&P uses to determine insurance company ratings. The other parts include capitalization, competitive position, enterprise risk management, financial flexibility, industry risk, investments, liquidity, management and strategy, and operating performance.

Under the proposed changes to the capital model, a formula would be applied to each insurance company to garner a "target capital" figure. That figure would estimate the total amount of capital the company needs to cover all of its potential risks.

While the impact of the new model will vary based upon individual companies' risk profiles, S&P, among other things, noted in explanatory documents that "capital requirements for primary property/casualty insurers will be increased substantially in the new model because a requirement for natural catastrophic risk is being included as a hard test."

In a conference call with analysts, S&P credit analyst Grace Osborne said that while the rating agency has periodically made updates to its capital model--first introduced in 1991--the proposed overhaul of the way insurance company capital is assessed stems from increased complexity in insurance products and growing volatility in the insurance sector in recent years.

S&P said it expects the new capital model to be finalized in the first quarter of 2007.

S&P is soliciting feedback on the proposed revisions to the model from insurance companies and other industry participants through Feb. 14, 2007. Comments can be sent to criteriacomments@standardandpoors.com.