Credit Rating Methodology Property/Casualty Insurers. ASSEKURATA Assekuranz Rating-Agentur GmbH

Transcription

1 ASSEKURATA Assekuranz Rating-Agentur GmbH october 2015

2 Contents CONTENTS... 2 INTRODUCTION Rating Process Order Placement Data Requirement Document Analysis Management Interview Drawing up the Rating Report In-house Quality Assurance Rating Findings in the Rating Committee Rating Scale Rating Report Submission to the Entity Decision on Publication Publication Regular Monitoring and Follow-up Rating Rating Adjustments Withdrawal of the Rating Rating Methodology

3 Introduction According to regulation (EC) No. 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies the expression Rating means an opinion regarding the creditworthiness of an entity, a debt or financial obligation, debt security, preferred share or other financial instrument, or of an issuer of such a debt or financial obligation, debt security, preferred share or other financial instrument, issued using an established and defined ranking system of rating categories. Assekurata exclusively carries out ratings for rated entities the representatives of which appointed the agency in writing to draw up the rating (appointed ratings). Assekurata draws up entity ratings and creditworthiness ratings. The creditworthiness rating of Assekurata evaluates the financial capacity of German insurance and reinsurance companies. Thereby both key factors of the business world and overall factors of the business world are evaluated. The key factors include both quantitative ratings such as for instance the calculation of a Value-at-Risk coverage rate and also a qualitative rating of entity management. 3

4 1. Rating Process 1.1 Order Placement At the start of a rating the entity to be rated and Assekurata conclude a rating contract. In the contract Assekurata is committed to confidentiality in connection with the rating during said rating process. Confidentiality regarding the results continues to be maintained after termination of the rating should an insurer decide against publication of said rating. In return, the entity discloses comprehensive internal data in the course of the rating process and the executives are at disposal for interviews. Assekurata keeps in very close contact with the entity during the entire rating process. The operative contact (rating co-ordinator) ensures a smooth exchange of information in real-time. The contact at Assekurata is its respective senior analyst. 1.2 Data Requirement After order placement the entity to be rated receives a list with the information and documents required. These are required for preanalysis purposes and to prepare the management interviews. The data volume depends on whether the rating is an initial or a follow-up rating. Customarily Assekurata requests the entity to be rated to submit the following documents for an initial rating: Complete export files of data transmission to insurance supervisory office (DÜVA) covering the past five financial years Audit reports and annual reports of the past five financial years Annual financial statements of the last financial year Entity/Group Structure Group s organisation chart/ entity s organisation chart Table of the ownership structure of the entity/group to be rated in which the entity to be rated is integrated Portfolio of the board members Table of outsourced functions (including charging systems) Table of existing corporate contracts and letters of comfort Regional distribution of locations Solvency BaFin (Federal Financial Supervisory Authority) evidence for individual solvency BaFin evidence for group solvency Planning and solvency funds for the coming five years Results of the respective latest BaFin stress tests (including derivation) for all group entities Capital injections and capital drains in the fiscal year, e.g. for the presentation of results Management Documents on entity s strategy, on the corporate mission and on the management principles of the entity Reports of standard reporting: o Monthly, quarterly reports on earnings development o Medium term budgeting (3-5 years) o Continuous profit and loss projections with target/actual comparison regarding fiscal year plan o Monthly, quarterly reports on sales results (planning according to lines of business/ distribution channels/ products) o Continuous comparison target / current appertaining to the planning for the fiscal year Current examples of reporting to the supervisory board Market Positioning Relevant market, market forecasts Shares of the market, market share shifts Area of business operations Regional locations, regional relocations respectively International activities 4

5 Sales Presentation of the sales channel mix Share of sales according to sales channels Number of agents in the field service Presentation of fluctuation in sales Reserves and Reserve Policy Claim reserves and claim reserve policy Special reserve for exchange-rate fluctuations and similar provisions Guidelines on the calculation of claim reserves broken down into insurance branches Explanation of possible reserves within claim reserves Run-off triangles (as Excel file) of the third party motor insurance, of the general liability insurance, of the accident insurance and of legal expenses insurance Reinsurance Presentation of the intra-group and external reinsurance relations (type, volume and targets of the reinsurance) Guidelines and selection criteria for reinsurance partners For reinsurances handled actively: Underwriting guidelines Underwriting limits Organisation of the underwriting process Capital Investments Capital investment structure at book values Capital investment structure at current values Principles of fair value measurement of nonlisted assets Ordinary income and expenses from capital investments Write-ups and write-downs in capital investments Profit and loss from the disposal of capital investment Other income and expenses from capital investments Administration expenses for capital investment Risk information regarding the individual capital investments Questions regarding the organisation of the capital investment Questions regarding human resources and technical line-up of the capital investment Questions regarding risk management in the capital investment Questions regarding capital investment strategy Enterprise Risk Management Risk strategy laid down in writing according to Point 7.1 BaFin circular 3/2009 and the relevant business strategy. Documentation on integration of the risk management system in the process of strategic management Presentation of the operational and organisational structure of risk management according to Point 7.2 BaFin circular 3/2009 Documentation on the structure of the risk model and of the risk-bearing capacity concept according to Point BaFin circular 3/2009 Documentation on an operational ALM system applied (ALM calculations; basic scenario and extreme scenarios) Documentation on the risk control process according to Point BaFin circular 3/2009 (risk inventory, risk manual, risk management) Current risk report according to Point BaFin circular 3/2009 or Articles 55c, 64a VAG, respectively Emergency planning including defined emergency scenarios according to Point 9 BaFin circular 3/2009, examples for in-house risk communication according to Point BaFin circular 3/2009 Current BaFin scenario calculations Results of the last Quantitative Impact Study (QIS) Information on proportionality application if applicable Limit manual, to be precise documentation on the limit system Two examples of documented processes (preferably from the field of investment and actuarial practices) Documentation on anticipated implementation of a governance system in the terms of Article 41 et seq. Solvency II framework directive (Articles 24 et seq. VAG-E) 5

6 Documentation of Own Risk and Solvency Assessment (ORSA) Documentation of (planned) introduction of an ORSA process (Key words: risk tolerance, total risk profile, risk capital management, scenario analyses Documentation on the planned fulfilment of reporting requirements according Solvency II Pillar III Audit manual for perusal Current audit report according to Article 55c VAG Example for 2 current audits for information (preferably in the range of investment and performance) Relevant documentation on ALM system applied (ALM calculations; basic scenario and extreme scenarios) Premium and reserve risk calculation according to standard formula (last QIS) in the individual lines of business Thereof resulting total premium and reserves risk Disaster risks for natural disasters (storm, earthquake, flooding, hail) and man-made disasters Mode of calculation for above risks (QIS studies, internal impact studies, reinsurer calculations, ) If available, calculation regarding probability distribution of results in the lines of business (gross and FER) If available VaR or tail VaR both for the individual lines of business and aggregated, i.e. after consideration of the diversification impacts (gross and FER). 1.3 Document Analysis The content analysis of the data includes the upgrading/downgrading and plausibility check of the information from the various sources. Subsequently the analysts at Assekurata evaluate the information both with regard to quantity and quality using data bases and analysis systems and not least detailed checklists catalogues. The information gained form the basis for the survey questionnaire of the executives in management interviews. 1.4 Management Interview The management interview is a key element of credit rating. Hereby the rating team, jointly with the management, discusses topics such as, for instance market development, strategy of the entity, reinsurance policy, capital investment strategy, sales channel structure, calculation basics, risk assumption policy and the development of premiums. The purpose of the interviews is to scrutinize the entity key data and to include such quality aspects in the rating, the latter cannot be derived from the figures alone. Depending on entity structure and importance of the entity s units, further locations are also inspected apart from the headquarters. The number of meetings and duration of the stay depend on the size and complexity of the entity. 1.5 Drawing up the Rating Report The information and data gained in the management interviews are analysed together with the documents collected in the run-up and evaluated on the basis of a rating model. The results are documented in the rating report. The rating team discusses the notation proposal for the rating committee. Each member shares the responsibility for the rating and the quality of the report. 1.6 In-house Quality Assurance Stringency and consistency of the models, methods and processes implemented undergo quality assurance in an in-house rating colloquium of Assekurata. Apart from the analysts involved, the managing director of analysis, the business unit manager of analysis and the specialist co-ordinator of quality assurance participate in this in-house rating colloquium. After the rating proposal has been checked by the in-house rating colloquium it is sent to the external members of the rating committee. 1.7 Rating Findings in the Rating Committee The rating committee checks and discusses the proposal of the rating team. The final rating must be resolved unanimously. The rating committee is made up of the respective senior analyst, the subject coordinator quality management of Assekurata and at least two external experts. The 6

7 credit rating of Assekurata is therefore an evaluation of experts. In-house members of the Rating Committee: Senior rating analyst Assekurata head of analysis division, Abdulkadir Cebi, or head of analysis division, authorised signatory Lars Heermann External members of the Rating Committee: Graduate of business management Stefan Albers, legally appointed insurance consultant Graduate of mathematics Volker Altenähr, former chairman of an insurance company, lecturer at the Cooperative State University Baden Württemberg, Mannheim Graduate of mathematics Marlies Hirschberg-Tafel, former chairwoman of an insurance company Rolf-Peter Hoenen, former chairman of an insurance company and former president of the German Insurance Association (GDV) Graduate of business Eberhard Kollenberg, former partner of an auditing company Thomas Krüger, former chairman of an insurance company Prof. Dr. Torsten Rohlfs, auditor, Professor of risk and claims management at the Institution for Insurance at the University of Applied Sciences Cologne Graduate of business Ulrich Rüther, former chairman of an insurance company Prof. Dr. Heinrich R. Schradin, Director of the Institute of Insurance Studies at the University Cologne The same requirements apply to the external rating committee members with regard to their impartiality as do to the in-house rating analysts: A member of the rating committee is excluded from the rating should the latter s impartiality possibly give reason to doubt. This would particularly be the case if the member should hold an office, e.g. in a supervisory board of the insurer to be rated. In such a case the said rating committee member neither receives the rating proposal nor can he/she participate in the meeting. The impartiality of Assekurata is, furthermore, laid down in its statutes and cannot be changed, not even by a shareholders meeting. 1.8 Rating Scale The rating scale is sub-divided into 22 credit rating categories ranging from AAA (prime rating) to D (in default). These are sub-divided in nine master categories which classify the existing creditworthiness and the default risk in such connection verbally. 1.9 Rating Report Submission to the Entity The results of the rating are compiled in a rating report. The report provides management with an insight into the evaluation results. Furthermore, the rating team presents the results to the executives of the insurance company in a final presentation Decision on Publication After the results have been revealed, the board of the rated insurance company can decide, within ten working days, whether the rating is made public. It is only with the permission of the client, drawn up in writing that publication follows. Should the insurer decide to grant an approval for the rating, the rating can be used in public. If the entity concerned objects to a publication, Assekurata also respects observation of confidentiality with regard to the rating Publication Rating Report: The analysts compile the rating in a report for the public. Assekurata places it on its website for free reading and downloading. Quality seal: Assekurata-credit ratings comply with a high standard. Rated companies acquire a quality seal which provides credible evidence of their quality in the market. Data storage of the European Supervisory Authorities ESMA: Assekurata is committed to report its published ratings to central data storage, to so-called Central Repository for Credit Rating Agencies (CEREP). You find further information under 7

8 Rating Platform: As member of the European Association of Credit Rating Agencies (EACRA) Assekurata is willing to publish ratings on the global rating platform supported by EACRA. You find further information under Regular Monitoring and Follow-up Rating The Assekurata credit rating is checked comprehensively at least once a year and upgraded/downgraded as required. During the year the development of the entity and of the rating is continuously monitored by the senior analyst(monitoring). The topicality of the rating is thus ensured at all times. Should particular incidences occur, for instance significant changes within the entity or the environment of the entity, Assekurata carries out ad hoc controls and if necessary, carries out a rating adjustment to ensure that the credit rating of an entity remains up to date at all times. If the rating contract is terminated, the rating may no longer be used in public. Assekurata informs the public by means of a press release that the rating is no longer applicable Rating Adjustments Should extraordinary incidences or developments occur in the validity period, which have an impact on the rating of the entity, Assekurata may adjust the rating at any time. Should, in the opinion of Assekurata, the adjustment of a rating become necessary, Assekurata informs the entity concerned correspondingly. The public is informed by entering the rating concerned in the Watch List and a corresponding press release is sent out. Thereby the rating report is not adjusted. Assekurata identifies companies, the ratings of which are currently in the Watch List with the suffix Rating on its website. For checking purposes Assekurata demands detailed information in connection with the rating from the entity concerned. Ratings on the Watch List do not necessarily lead to a change of the rating notation. The rating committee of Assekurata makes a decision on whether the rating may possibly have to be adjusted (upgraded or downgraded). Should the latter be the case, the rating report will be adjusted correspondingly. By the EC regulation 1060/2009 Assekurata, as regulated Credit Rating Agency (CRA) is committed, in case of a fundamental adjustment of the rating model to check the current rating of the client once again. Should the verification lead to a change of the rating, the regulations governing the modus operandi for extraordinary occurrences apply analogously. Assekurata does not bill any extra expenses to the entity concerned to transfer a published rating to the Watch List. Assekurata charges the entity concerned additional expenses which are, in the individual case, agreed upon with the entity for upgrading and downgrading work Withdrawal of the Rating Should the entity be deprived of its fundamentals for the published rating due to particular developments (e.g. by merger, transfer of stock/portfolio or the similar), the published rating will be withdrawn. Even in the cases in which Assekurata cannot maintain the original result, in which however the entity concerned rejects a downgrading or even to co-operate, a rating is withdrawn. In the latter case Assekurata informs the public in the form of a press release. Assekurata does not bill additional expenses for the withdrawal of the rating. 8

9 2. Rating Methodology The rating considers both individual key factors of the business world as well as overall factors from the environment of the entity. The rating of the key factors is based on a systematic and detailed analysis of the business key figures of the internal and external accounting and on the qualitative factors of a value-based entity management. The rating of the key figures is made along the line of benchmarks which are oriented along the lines of the market and sector facts. Thereby Assekurata at all times considers the particularities of the entity to be rated, for instance its individual business mix. The Assekurata-Value-at-Risk-model (VaR model) plays a particular part in the evaluation of the capital investment risks. The interest credit share, real estate and currency exposure are essential factors of influence for Assekurata VaR, and not least the durations, hedging measures, concentration risks and diversification effects in such respect. The VaR calculated is then transferred to a solvency-oriented rating model. The latter is complemented by capital investment risks of insurance risks and operational risks. The total capital requirement resulting thereof is compared with the securities available to derive a quantitative figure on the degree of corporate security coverage as calculated. The rating of the key figures is supplemented by a comprehensive qualitative verification of the entity management, into which the assessment of the earnings and growth potentials, but also the existing risks flow. In this case Assekurata evaluates the implementation of a holistic risk management system, which, apart from fulfilling the supervisory specifications, also includes an appropriate organisation structure and risk culture and an adequate management of capital investment risks, insurance risk issues and operational risks. Apart from the key factors, Assekurata also considers the overall factors of the business and entity environment in its credit rating. These particularly mirror the risks arising from the market, the business line, the business region, the competitive positioning and the political and legal risks regarding their impact on the entity. The analysis and quality rating of the key factors and overall factors finally lead to the overall assessment (rating assessment) of the creditworthiness of an entity. The Assekurata credit rating is therefore not a purely mechanical rating of the key figures but always the opinion of experts. Key Figures The rating includes key figures which particularly mirror the securities as well as the future prospects of enhancing the latter by contributions to earnings and growth. Therefore Assekurata observes the following key figures and their driving factors in the rating process: Equity position Total securities (equity + reserve for exchangerate fluctuations) Degree of solvency coverage according to supervisory requirements Solvency according to the Assekurata-Value-at- Risk approach Claim reserve ratio and settlement results Actuarial earnings ratio (annual and of several years) Net interest return (annual and of several years) Capital investment performance (of several years) Gross surplus ratio (of several years) Economic success rate (annual) Economic success in relation to administration costs Premium growth (annual and of several years) Contract growth (annual and of several years) Entity Management Rating Assekurata evaluates the risk management system of insurers on the basis of a holistic entity management approach. Thereby, apart from the organisation and structure of the risk management system, the operational management of the individual risk dimensions and the latter s networked management is rated. 9

10 Taken before this background considering specific particularities of the business line both the strategic risk management and the operative risk management are subjected to a detailed analysis. The following fields are subject to the analysis: Risk strategy Integration of risk management in corporate (focus on value) management control Structure and procedure of risk management organisation Internal management and control system Risk-bearing capacity, limit system Risk control process (risk identification, risk analysis, risk management, risk monitoring) Risk culture Risk reporting In-house auditing Emergency planning Further analyses deal with entity management within the line of the business field pursued and the capital investments. The following are relevant for the rating of the capital investments: Capital investment strategy and management Earnings potentials (current income, performance and risk-bearing capacity) Capital investment risk management Interaction of entity planning in the past Rating of the overall factors The overall factors include risks, which have not been collected in the audit of the entity management. Risks going hand in hand with a smaller sized entity are considered here just as are the risks which have an impact on the entity from outside. Particularly the following aspects are examined: Opportunities and risks arising from corporate grouping Risks arising from the small size of the entity (lacking system relevance) Possibilities of capital procurement Corporate strategy Suitability of the bodies Control function of the supervisory bodies IT risks Danger from dependency on single persons Fraud risks Reputation risks Political risks Regulatory risk requirements Legal risks Image of the industry The analysis of the business field management includes, among others, the following: Business unit diversification Regional diversification Checking the customer segments (industry, trade, private) Claim reserves Handling duration in the units Special insurance capital Calculation and acceptance policy Reinsurance Risk controlling Pro-active risk management Dependencies on sales channels Significance of individual co-operations Fluctuation in sales Forecasts with regard to premiums, casualties, costs 10