Reinsurers worry about capital

Standard & Poor's (S&P) has claimed that parts of the global reinsurance market continue to have mis...

Standard & Poor's (S&P) has claimed that parts of the global reinsurance market continue to have misconceptions about the ratings agency's approach to assessing reinsurers' financial strength.

"Parts of the reinsurance community continue to focus on capital adequacy as though it were the pre-eminent driver of financial strength when, in fact, it constitutes only a part of one of the eight categories of analysis used in the assessment of financial strength," said S&P credit analyst Simon Marshall.

The rating agency said that reinsurers' level of capitalisation (of which a reinsurers' capital adequacy is a part) is the only category of analysis that is fully dependent on the other seven categories. These include industry risk, management & strategy, competitive position, operating performance, investments, liquidity and financial flexibility.

As such, capitalisation can be perceived as the only lagging indicator of financial strength used in the ratings analysis, suggesting that as a basis for future financial strength the other seven categories should have an important focus.

S&P said that while the market continues to focus on the capitalisation category of analysis, it was important that its analytical approach is correctly understood. It added that the market should learn to view S&P analysis of capitalisation not just as an assessment of the adequacy of capital, but also the quality of capital, the adequacy of reinsurance and the adequacy of reserves.

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