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Reinsurance proposal won't hurt ratings: Best

Posted On: May. 31, 2007 12:00 AM CST

OLDWICK, N.J.--A proposal to create a new regulatory regime for reinsurers operating in the United States would have little impact on the financial strength ratings of U.S. property/casualty and life/health insurers, rating agency A.M. Best Co. Inc. said Wednesday.

Oldwick, N.J.-based Best reviewed a proposal before the National Assn. of Insurance Commissioners that would establish a Reinsurance Evaluation Office, intended to be the foundation for a risk-based evaluation process that would require amending state laws concerning credit for reinsurance.

Under the proposed process, the REO would review each reinsurer doing business in the United States using rating agencies' financial assessments as well as other information about each reinsurer, including its claims-paying history. The REO would then assign one of six ratings to a reinsurer. Each rating would determine, in increments of 20%, whether the reinsurer must post collateral that would range from zero to more than 100% of its U.S. liabilities.

In its statement, the rating agency said: "Of the 895 property/casualty ratings assigned by Best within the United States, only 45 organizations, or 5% of the U.S. P/C ratings would see a material change" in their individual capital adequacy ratio, which Best calculates by dividing an insurer's adjusted surplus by its net required capital.

Best defined a "material" change as one that would lower that surplus/required capital ratio by more than five points, resulting in a ratio below 175.

Yet, "many companies considered to face a material impact as defined in this study may face little actual rating pressure," according to the statement. That is because a ratio of 175 "typically can support A.M. Best's highest ratings depending on a company's operating performance and business profile," it said.

While the study focused solely on property/casualty insurers, Best added that "the REO proposal is not expected to be a significant issue for the life/health insurance industry." Over the past several years, reinsurance recoverables for such insurers "have hovered at about 6% of statutory capitalization, much lower than the 60% ratio for P/C companies."

Best's statement was released ahead of the NAIC's summer meeting June 2-5 in San Francisco, where the REO proposal is expected to be discussed.