ERM scores critical on reinsurers’ ratings

Experts have highlighted the growing importance rating agencies place on strong enterprise risk management (ERM) within reinsurers and how this criterion is now of critical importance for certain reinsurance groups.

Rating agency Standard & Poor’s recently published an update on its ratings of the largest 23 reinsurance groups. It disclosed its ‘rating anchors’ as well as the final financial strength ratings of the operating reinsurers of each group.

Litmus Analysis, the specialist ratings advisory firm, has noted how for two well known reinsurance groups – Catlin and Lancashire – their high scores in S&P’s ERM analysis proved critical to their eventual rating.

The financial strength rating anchor for Catlin and Lancashire is bbb+ – below what is often perceived as a key threshold of market acceptance. However, each achieved a ‘strong’ score for ERM – enough to push the indicative rating up one notch to the crucial A- level.

S&P uses lower case letters for the ‘Ratings Anchor’ element of the analysis to indicate that these are not ratings.

In Catlin’s case a further notch uplift to ‘A’ was achieved through S&P’s ‘holistic’ analysis whereby the agency may add or subtract a rating notch based on a final view of particularly strong or weak credit factors not already sufficiently captured by its analysis. For Catlin this reflected in particular S&P’s view of the strength of its competitive position and the relative quality of its earnings versus its peer group.

“For both organisations, the ERM score is clearly a powerful affirmation of management quality, however, I would presume they would be more comfortable being able to achieve the ‘A-‘ rating level via the Business Risk and Financial Risk profiles that drive the initial rating anchor. Not least given that what constitutes high quality ERM is a bar that is permanently being raised,” said Stuart Shipperlee, analytical partner at Litmus.