Insurance RBC Criteria 2023
S&P Global Ratings has published updated methodology and assumptions for analyzing the risk-based capital (RBC) adequacy of insurers and reinsurers.
What is Risk-Based Capital in Insurance?
S&P Global Ratings uses its insurer capital adequacy methodology to analyze the risk-based capital (RBC) adequacy of insurers and reinsurers. This framework assesses companies’ capital sufficiency to support their business operations and protect policyholders. RBC is an important element of our credit rating analysis within the insurance sector, as it provides a standardized, globally consistent methodology for assessing the capital adequacy of insurers as part of our credit rating process. The 2023 updates to the Insurance RBC Criteria introduce several key changes aimed at enhancing the robustness of the framework.
What’s New for Insurance Risk-Based Criteria 2023?
The 2023 updates to our Insurance RBC Criteria include significant changes designed to address evolving risks and improve the global comparability of capital adequacy assessments. These updates are informed by feedback from industry stakeholders and aim to align the criteria with current market conditions. The 2023 criteria incorporate recent data and experience supporting refinement of the assessment of risks such as underwriting, asset, and credit. We have improved the global consistency, transparency and usability of our methodology, such as the superseding of 10 related criteria articles with the new single criteria article.
Key Components of the 2023 RBC Criteria
Underwriting Risk
Underwriting risk is a critical component of the RBC framework, as it pertains to the risk of loss from insurance policies that an insurer has underwritten. The 2023 criteria introduced changes to the assessment of underwriting risk, including updated and new factors that account for emerging risks such as pandemic risk. These changes are designed to provide an updated reflection of the potential losses that insurers may face from their underwriting activities.
Asset Risk
Asset risk refers to the risk of loss from an insurer's investment portfolio. The 2023 criteria include updates to the evaluation of asset risk, with a focus on enhancing the assessment of market and interest rate risks. These updates are designed to align risk charges globally and better reflect the potential for market volatility to impact asset values.
Credit Risk
Credit risk involves the risk of loss from counterparties failing to meet their financial obligations. The 2023 criteria introduce globally consistent assumptions for determining the rating input for bonds and loans to better differentiate risk. We have enhanced risk differentiation in our credit risk capital requirements for bonds and loans to capture variations in recovery based on sector, creditor ranking, and collateral features. These changes are intended to provide a more comprehensive view of an insurer's credit exposure and enhance the accuracy of capital adequacy assessments.
Capital
Total Adjusted Capital (TAC) is a core metric used by S&P Global Ratings to measure an insurer's available capital to absorb losses. It serves as a globally consistent capital measure for determining RBC capital adequacy. The 2023 criteria introduced reduced complexity in TAC evaluation by the removal of various haircuts and recognition of equity like reserves. We have also revised our methodology for including hybrid capital and debt-funded capital in TAC.
Diversification
In the insurance sector, diversification serves as a foundational mechanism for capital optimization and solvency protection. The 2023 criteria introduce enhanced recognition of diversification benefits by applying correlation matrices across asset and insurance risks to reduce the total RBC requirements, offsetting higher stand-alone capital charges. It uses a multi-level approach to recognize that risks (e.g., life vs. non-life, asset vs. insurance) do not all materialize simultaneously.
Updated Insurer Risk-Based Capital Adequacy Criteria
S&P Global Ratings has published updated methodology and assumptions for analyzing the risk-based capital (RBC) adequacy of insurers and reinsurers. The publication of these updated criteria was the final step in a market consultation process that followed the publication of an updated Request for Comment in May 2023.
We apply the output from these criteria in our insurance framework to assess capital and earnings--a key rating factor for insurers. These updated criteria apply globally to all insurers in the life, property/casualty, health, mortgage, trade credit, and title insurance and reinsurance sectors. We apply the bond insurance capital adequacy criteria to assess the risk-based capital adequacy of bond insurers.
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S&P Global Ratings Insurance Team
S&P Global Ratings Insurance Team
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