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A Large Insurer Enhances Its Internal Model for Solvency Capital Requirements


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A Large Insurer Enhances Its Internal Model for Solvency Capital Requirements


THE CLIENT: A large European insurance company

USERS: The risk management team

Solvency II came into effect in January 2016, introducing a significant change in the way in which the EU insurance sector is regulated. The directive and subsequent reviews require insurance companies to hold capital in relation to their risk profiles to guarantee that they have enough financial resources to withstand any difficulties.

Market and credit risk contribute significantly to the solvency capital requirement of insurance companies and are also of material importance for many internal model undertakings. The components of market risk include interest rate, equity, property and currency risk. The components of credit risk include default, migration and spread risk. According to the European Insurance and Occupational Pensions Authority (EIOPA), the first credit risk relates to the default of the issuer of securities, the second to spread movements for rating migrations and the third to spread movements within the same credit rating class.

This large European insurance company opted to follow the internal model approach to calculate the solvency capital requirement for some of its businesses because it better reflects those businesses’ risk profile. As such, the risk management team at the company required more data to enhance its internal model default and transition parameters to adequately reflect these risks.

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Pain Points

Members of the team wanted to enhance their approach for assessing credit risk and needed a solution that would enable them to:

  • Efficiently evaluate probabilities of default based on authoritative default, transition and recovery data from a trusted provider.
  • Improve parameters where internal data was lacking.
  • Analyze historical transitions and better document data used to update parameters.
  • Integrate rating transition matrices and default rates in credit risk assessments that were similar to their portfolio.
  • Systematically evaluate default and transition information across geographic regions, industries, sectors and timeframes.

Thanks to the close partnership that S&P Global Market Intelligence (“Market Intelligence”) had with the insurer overall, specialists from Market Intelligence began discussions regarding available solutions that could meet the team's needs.

The Solution

Specialists from Market Intelligence described CreditPro®, a robust analytic tool used in formulating future default and ratings migration scenarios, as well as validate internal rating systems used for credit risk analysis. CreditPro provides tools to help evaluate probabilities of default (PDs), analyze historical credit rating transitions, defaults and recoveries. Consistently defined, measured and maintained, CreditPro's comprehensive datasets support the development, calibration and/or back testing that analytical risk valuation models must meet today. The solution would address the requirements stated by the risk management team and provide the ability to:

Access time-tested data

CreditPro provides a full picture of credit risk exposure with access to authoritative default, transition and recovery data and powerful analytic tools. Users can efficiently evaluate PDs based on S&P Global Ratings default and ratings migration data covering more than 17,000 companies, 130,000 securities, 120,000 structured finance issues and more than 160 sovereign ratings across the globe.
[1] CreditPro provides default analytics, trends and performance data from 1981 Importantly, CreditPro provides a unique list of issuers, eliminating any double counting. This vast collection of default and ratings history data includes:
    • Marginal default rates.
    • Cumulative default rates.
    • Rating migrations.
    • Company counts.

    The solution provides reports that show the percentage of issuers or issues that defaulted and the ratings that were upgraded or downgraded.

Analyze the historical default rates

Users can analyze the historical default probability of an entity, issue or securitized issue, by ratings category, within specified parameters. An added benefit lets users examine the data by rating category or in finer detail by including rating notches, investment grade, speculative grade or all rated.

Assess credit ratings in transition

Users can access a series of transition matrices to assess and compare the credit ratings behavior of companies, sovereigns or securitized issues over specified time periods by industry and country.
There is an enhanced ability to base credit risk assessments on rating categories, or to include more granular rating detail by applying rating notches (e.g., "BB-") to the rated universe, including investment and speculative grade ratings.

Assess loss and recovery trends

All recoveries in CreditPro are shown in net present value and nominal terms. Users can also calculate recoveries with other applicable discount rates. Recovery rates include pricing at the time of emergence, settlement or liquidation. In addition, debt cushion calculations, revolver utilization history and ratings history for the issuer and its debt instruments are provided, as are trading prices at the time of default.

Seamlessly access data when and how they want it

Flexible delivery options include desktop access and/or automated delivery via XpressfeedTM , XpressAPI and cloud service provider Snowflake for ratings default and transition data from CreditPro.

Key Benefits

Members of the risk management team saw the benefits of using a solution from a well-recognized provider and the need to minimize the negative impacts of either overstating or understating the capital provisions. They subscribed to CreditPro and are now able to:

Evaluate the likelihood of default and transition information across geographic regions, industries and sectors.

Adjust their own credit risk assessments based on the comparable historical ratings movements of similarly rated obligors or issues.

Drill into the database for granular detail and export data and tables.

Meet audit requirements by documenting the internal model build and indicating where the default and migration data was sourced.

Have ongoing support from experienced credit risk specialists.

The team also expressed an interest in learning about other related datasets to potentially add to their CreditPro subscription:

-RatingsXpress®: Scores & Factors provides transparency into how S&P Global Ratings analysts establish an issuer credit rating and provides access to the underlying business, financial, industry and economic risk factors and assessments, plus the stand-alone credit profile.

-S&P CreditStats Direct™ provides access to analyst-adjusted financial statements for 960+ global banks, 2,700+ corporates and 20,000 revenue sources for U.S. public finance[2]to help improve the clarity, consistency and comparability of credit risk analysis.

-S&P Capital IQ Financials provides global standardized financial statement data for over 150,000 companies, including over 95,000 active and inactive public companies.

[1]Coverage as of October 2020.

[2]The source(s) of funds that are pledged by an obligor to pay the principal and interest on one or more debt instruments.

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