Aon Benfield Analytics | Rating Agency Advisory Proprietary and Confidentialthoughtleadership.aonbenfield.com/Documents/20170404-ab... · 2017. 9. 17. · Analytics | Rating Agency

Aon Benfield Analytics | Rating Agency Advisory Proprietary and Confidential

Risk. Reinsurance. Human Resources.

Evolving Criteria April 2017


Evolving Criteria: April 2017 1

Table of Contents Executive Summary 2

Rating Criteria Updates 3

A.M. Best 3

Standard & Poor’s (S&P) 15

Moody’s 16

Fitch 16

Demotech 17

Regulatory Developments 18

North America 18

Europe, Middle East, and Africa 20

Asia Pacific 23

Caribbean 23

Latin America 24

Looking Forward: Key Topics for 2017 25

Appendices 26

Contact Information 34



Executive Summary Evolving Criteria encapsulates the key global rating agency criteria and regulatory developments over the last year.

Topics addressed in this report include:

Rating agencies issuing new or updated criteria:

– A.M. Best released draft stochastic-based BCAR models for US P&C, life & health, and global companies

– In conjunction with the BCAR model releases, A.M. Best issued Best’s Credit Rating Methodology (BCRM) draft criteria that is intended to increase transparency in the ratings process

– Moody’s clarified their approach to rating high trigger contingent capital securities

– Fitch Ratings published updates to its methodology for rating insurance companies, which are primarily clarifications to pre-existing methodology as well as criteria for mortgage insurers

– Demotech suspended their published guidance for Florida insurers

Global regulatory updates:

– Increasing regulatory standards is a theme globally with some countries adding additional requirements for foreign companies

– Risk based capital models are continually growing in importance and evolving

Capital adequacy (as measured by rating agency models) continues to grow

Companies are working to define enterprise risk management (ERM) stress scenarios and risk tolerance statements

As the insurance and reinsurance industry continues to change rapidly, both rating agencies and regulators continue to evolve as well. The impact of rating agencies is well understood in the industry and changes in their criteria are of key interest to the companies they rate.



Rating Criteria Updates The main focus of rating agency criteria updates in 2016 and 2017 has been A.M. Best’s stochastic-based BCAR models and Best’s Credit Rating Methodology (BCRM). In March 2016, A.M. Best released draft criteria for the stochastic-based US P&C BCAR model and BCRM. This was followed by a clarifying briefing in May regarding catastrophe risk. In November 2016, A.M. Best rereleased the US P&C BCAR model and BCRM draft criteria with changes in addition to a first release of the Universal stochastic-based model (non-US) and the life & health model draft criteria. This remains a key focus as the industry begins to understand what impact this will have on companies.

A.M. Best

Stochastic-based BCAR model overview (All models) Rather than having one BCAR score, A.M. Best will calculate multiple BCAR scores at various confidence intervals which will give insight into the point that a company’s equity falls short of required capital. A.M. Best will publish scores of four confidence intervals (95, 99, 99.5 and 99.6) in the insurer's company report when the methodology is adopted. The 99.8 confidence interval (500 year return period) will be calculated but unpublished and will be used in discussions regarding how companies manage tail risk within enterprise risk management evaluations.

Current model Stochastic-based model

Capital adequacy ratio

Adjusted surplus Net required capital

Target score varies by rating level

Adjusted surplus – net required capital Adjusted surplus

Redundant capital if score > 0 percent

Confidence intervals - 95 99 99.5 99.6 99.8

Catastrophe charge

250yr EQ or 100yr wind

By peril Reduction to adjusted surplus After-tax net PML, VaR

occurence

20yr 100yr 200yr 250yr 500yr

All perils Addition to net required capital Pre-tax net PML, VaR

occurence The 99.8 confidence interval will be used within the ERM assessment Source: Aon Benfield Analytics

Draft BCAR model scores are not comparable to the current model. The BCAR formula is now:

(Adjusted surplus – Net required capital) Adjusted surplus

Scores greater than 0 percent reflect supportive capital adequacy for the indicative confidence interval. The 99.6 confidence interval is the highest published return period and the basis for obtaining a BCAR assessment of ‘very strong’ or ‘strongest’. To receive the ‘strongest’ assessment, companies need to have a score greater than 25 percent at the 99.6 confidence interval. For ‘very strong’ the BCAR threshold is 10 percent at the 99.6 confidence interval.



The BCAR descriptor may be modified for additional qualitative and quantitative factors such as quality of capital and appropriateness of reinsurance to determine a company’s balance sheet strength, which serves as the baseline Issuer Credit Rating (ICR). The ICR level achieved in the balance sheet assessment is then adjusted for A.M. Best’s view of a company’s operating performance, business profile, and ERM. These adjustments will be integral in determining a company’s final rating. The highest ICR a company can achieve based on the balance sheet assessment alone is an ‘a+’.

Additionally, country risk will play an important role in determining a baseline rating. Countries are placed into five tiers based on the stability of the environment. The highest balance sheet assessment a company can receive is capped by the country risk tier. For companies with business operations spanning multiple tiers, A.M. Best will use a blended country risk calculation.

BCAR assessment Amended proposed BCAR Starting ICR Corresponding FSR

Strongest >25 at 99.6 a+ / a A

Very strong >10 at 99.6 a / a- A / A-

Strong >0 at 99.5 a- / bbb+ A- / B++

Adequate >0 at 99 bbb+ / bbb / bbb- B++ / B+

Weak >0 at 95 bb+ / bb / bb- B / B-

Very weak



Source: A.M. Best Review & Preview Conference Materials

While BCAR remains only one component of the overall rating assessment, it is a key measure for balance sheet strength. Many companies use BCAR to set capital management strategies. As such, the transition to the new stochastic-based BCAR model will drive an increase in reinsurance demand to address potential shortfalls and align their capital management strategy with new the model.

Investment risk (All models) Bond default risk factors will be based on an economic scenario generator (ESG) with inputs reflecting the duration and asset quality of a company’s bond portfolio as provided in the Supplemental Rating Questionnaire (SRQ). Sovereign bonds rated ‘AAA’ receive no capital charge. Common stock default risk factors will also be based on an ESG with inputs reflecting the beta and R-squared of the portfolio as provided in the SRQ. In the Universal model, A.M. Best may adjust baseline investment factors based on a multiplier determined by Country Investment Classes (CIC). See Appendix I for investment charts A.M. Best shared that show the risk factors compared to the current model.

P&C reserve and premium risk (US P&C and Universal Models) Property casualty premium and reserve risk factors will begin with four industry probability curves based on size—very small, small, medium, and large. The size categories are determined by net written premiums or net reserves for each line of business. The curves will be adjusted for A.M. Best’s view of each company’s profitability (for premium) or volatility (for reserves). Diversification for premium and reserve risk will be based upon correlation matrices, and a growth charge will continue to be applied based on gross written premium or policy count. Capital factors for reserve and premium risk were not included in the Universal BCAR draft paper. Tables in Appendices II and III show the impact of the changes in the US model.

Catastrophe risk (US P&C and Universal Models) Currently, A.M. Best deducts from adjusted surplus the greater of a 1 in 100 wind event or a 1 in 250 earthquake event, including reinstatement premiums, on an occurrence basis. The draft model will use an occurrence, all-perils view of catastrophe risk and the return period will vary by confidence interval. A.M. Best moved the location of the catastrophe risk charge within the net required capital formula as ‘B8’ risk instead of as a deduction to adjusted surplus. This was done to be consistent with the other risk components and to keep adjusted surplus the same across all confidence intervals. Under the new BCAR criteria, the B8 catastrophe risk charge will be on a pre-tax basis and within the covariance formula. A.M. Best cited consistency with other components of the net required capital calculation for using a pre-tax net PML charge. Aon Benfield estimates that most companies with significant catastrophe exposure saw an increase in BCAR ranging from 3-10 points at the 99.6 confidence interval due to these changes. Higher increases were seen in companies that are domiciled in low tax environments as they benefited from the covariance inclusion with less offset due to the removal of the tax effect.

Confidence interval VaR 95 VaR 99 VaR 99.5 VaR 99.6 Return period 20 year 100 year 200 year 250 year

A.M. Best will continue to apply a catastrophe stress test by deducting a 100 year all-perils net loss including any reinstatement premiums from adjusted surplus along with making adjustments for additional credit and reserve risk. This is in addition to the B8 catastrophe risk charge that varies by confidence interval.



Under the new draft criteria, the catastrophe stress event will be on a pre-tax basis, consistent with the B8 risk charge. Aon Benfield views this treatment as inconsistent with other adjusted surplus components, such as deferred acquisition costs, reserve discount, and asset equity, which are calculated on a post-tax basis. We expect using a pre-tax net PML loss instead of a post-tax reduction to adjusted surplus for the catastrophe stress test will be challenged by the industry. This will only impact the catastrophe stressed BCAR results.

Terrorism risk will be measured under the same deterministic 5-ton truck bomb as the current methodology. A.M. Best has not clarified the mechanics of the terror stress test, including if it will be consistent across all confidence intervals or minimum BCAR requirements.

Mortality and morbidity risk (US List & Health and Universal Models) Risk factors for mortality and morbidity risk are broken out into four size bands that vary by confidence interval. Mortality risks will continue to be assessed based on volume of in-force insurance, net of reserves, and reinsurance. The factors are based on data from the Society of Actuaries’ mortality studies, including age, gender, smoker classification, and policy size. Company-specific adjustments are then made to account for line of business and size of the inforce block. Appendix IV shows the baseline factors by size and confidence interval.

Morbidity risk under the draft criteria is broken out by premiums and reserves, with separate size bands that are based on volatility studies. The four size bands vary by each line of business and are categorized as very small, small, medium, and large. Baseline premium factors are adjusted for company-specific profitability. The managed care credit will continue to apply, reflecting the reduced uncertainty of future claim payments. Appendix V includes a chart of morbidity premium factors for the large size category. Baseline reserve factors are adjusted for company-specific volatility or stability. In the current model, morbidity risk charges are applied to earned premium only and the quality of reserves for each line of business impacts the factors. Appendix VI shows morbidity reserve factors for the large size category.

Interest rate and variable annuity market risk (US Life & Health and Universal Models) Interest rate charges for annuity and life insurance products are based on an ESG, which projects cash flows for 30 years using 1,000 interest rate scenarios. The factors were then determined for each confidence interval using the value at risk (VaR) concept. Life reserves continue to be assessed lower risk charges as these liabilities are generally less interest rate sensitive. Annuities remain classified by surrender charge protection, withdrawal characteristics, and market value adjustments (MVA), with surrender charge protection being the main determinant for fixed deferred annuities. There are three sets of baseline interest rate charges based on asset liability management, as follows:

1. Asset duration equals liability duration

2. Asset duration greater than liability duration (at least one year longer)

3. Asset duration less than liability duration (at least one year shorter)

Appendix VII shows baseline capital factors for annuities assuming matched portfolios. These factors increased significantly from the current model and, in combination with the asset factor increases, result in higher capital requirements for annuity writers.



Best’s Credit Rating Methodology (BCRM) In March 2016, A.M. Best released its first draft criteria for the BCRM followed by a revised draft in November in conjunction with the stochastic-based BCAR models. The BCRM applies globally to all rated insurers. It is intended to increase transparency and provide insights on how companies are rated.

The ratings process assigns each rating unit an ICR, which is then mapped to a Financial Strength Rating (FSR) based on the table below. The FSR and ICR are published, but the industry is generally more familiar with the FSR. Most FSRs translate to multiple ICRs; therefore a company could be at the higher or lower end of the scale for that FSR level.

ICR FSR aaa / aa+ A++ aa / aa- A+ a+ / a A a- A- bbb+ / bbb B++ bbb- B+ bb+ / bb B

Source: Best’s Credit Rating Methodology (BCRM) – November 14, 2016

The BCRM report focuses on the determination of the ICR rating. First, an assessment of balance sheet strength (including BCAR results) is completed and a baseline ICR is selected. Next, that ICR can be adjusted either upward or downward by degrees of notches shown in the graph below for a company’s operating performance, business profile, ERM, comprehensive adjustment, and rating enhancement. For example, if a company starts with a baseline ICR of bbb+ and the operating performance and business profile each yield a +1, the ICR would move up two notches to ‘a’. If the ERM, comprehensive adjustment and rating enhancement are neutral, that company would have an ‘a’ ICR which translates to an ‘A’ FSR.


The BCRM paper also addresses other topics including components of the ratings process; rating units and lead company determinants; modifiers for group, reinsurance or pooled ratings, and notching of holding companies relative to operating companies.

Balance Sheet

Strength (e.g., bbb+)

Operating Performance

(+2 / -3)

Business Profile

(+2 / - 2)

ERM (+1 / -4)

Comprehensive Adjustment

(+1 / -1)

Rating Enhancement

Issuer Credit Rating (ICR)

Country Risk



Balance sheet strength The first step in developing a rating is an assessment of balance sheet strength. This begins with the BCAR results as measured by scores at various confidence intervals. Analysis of other factors such as quality of capital, stress tests, liquidity, appropriateness of the reinsurance program, and asset liability management form the balance sheet strength assessment. For example, A.M. Best notes that companies may receive a negative adjustment to the balance sheet assessment if their ceded PML relative to surplus is over an acceptable threshold.

The table below represents A.M. Best’s view of balance sheet strength and how it corresponds to an initial ICR, prior to any holding company adjustments. Note that rating units with less than USD20M USD of surplus will not be eligible for the ‘strongest’ assessment category.

Assessment BCAR ICR Key characteristics

Strongest >25 at 99.6 a+ / a

Strongest BCAR score with a demonstrated pattern of stability Strongest quality of capital and asset liability

management (ALM) Appropriate and diverse reinsurance program Strongest additional analytical factors

Very strong >10 at 99.6 a / a-

Very strong BCAR score with a demonstrated pattern of stability

Very strong quality of capital and ALM Appropriate and diverse reinsurance program Very strong additional analytical factors

Strong >0 at 99.5 a- / bbb+

Strong BCAR score with a demonstrated pattern of stability Strong capital and ALM Appropriate and diverse reinsurance program Strong additional factors

Adequate >0 at 99 bbb+ / bbb / bbb-

Adequate BCAR score that has been relatively stable Adequate capital and ALM Appropriate reinsurance program Adequate additional factors

Weak >0 at 95 bb+ / bb / bb-

Weak BCAR score with a demonstrated pattern of volatility Weak quality of capital and ALM Weak reinsurance program Weak additional factors

Very weak




A.M. Best provided its indicated balance sheet assessment from using stochastic-based BCAR for industry sectors shown in the chart below. Overall, the P&C sector has the strongest balance sheet assessment and there is wider variation in the health sector with 30 percent of the sector at weak or very weak.

Source: A.M. Best Review & Preview Conference Materials

Holding company impact Next, A.M. Best will evaluate the holding company to determine if it has a positive, neutral, negative, or very negative effect on the balance sheet strength of the rating unit. A.M. Best will be evaluating financial flexibility, liquidity, access to capital markets, financial leverage, and interest coverage. When no holding company exists, these same factors are reviewed for the lead rating unit if a company has more than one rating unit.

Assessment Notches Key characteristics

Positive +1

Consolidated BCAR score is more than adequate Financial flexibility, liquidity, and access to capital markets is high Financial leverage is low on both an adjusted and unadjusted basis Interest coverage is more than adequate

Neutral 0

Consolidated BCAR score is adequate Financial flexibility, liquidity, and access to capital markets

is adequate Financial leverage is acceptable on both an adjusted and

unadjusted basis Interest coverage is adequate

Negative -1

Consolidated BCAR score is inadequate Financial flexibility, liquidity, and access to capital markets is low Financial leverage is high on either an adjusted or unadjusted basis Interest coverage is inadequate

Very negative -2 to -3

Consolidated BCAR score is inadequate Financial flexibility, liquidity, and access to capital markets is

very low Financial leverage is very high on either an adjusted or

unadjusted basis Interest coverage is inadequate

64

27

5 2 1 1

52

23

9 7 6 3

34 28

6 3

15 15

0%10%20%30%40%50%60%70%

Strongest Very strong Strong Adequate Weak Very weak

Perc

ent

P&C Life Health



Country risk assessment Additionally, country risk will play an important role in determining a baseline rating. Countries are placed into five tiers based on the stability of the environment. See Appendix VIII for a chart of A.M. Best’s country risk assessments, which is updated annually.

The highest balance sheet assessment a company can receive is capped by its country risk tier. For companies with business operations spanning multiple tiers, A.M. Best will use a blended country risk calculation.

Balance sheet assessment CRT-1 CRT-2 CRT-3 CRT-4 CRT-5 Strongest a+ / a a+ / a a / a- a- / bbb+ bbb+ / bbb Very strong a / a- a / a- a- / bbb+ bbb+ / bbb bbb / bbb-

Strong a- / bbb+ a- / bbb+ bbb+ / bbb / bbb- bbb / bbb- / bb+ bbb- / bb+ / bb

Adequate bbb+ / bbb / bbb- bbb+ / bbb /

bbb- bbb- / bb+ / bb bb+ / bb / bb- bb- / b+ / b

Weak bb+ / bb / bb- bb+ / bb / bb- bb- / b+ / b b+ / b / b- b / b- / ccc+

Very weak b+ and below b+ and below b- and below ccc+ and below ccc and below Source: Best’s Credit Rating Methodology (BCRM) – November 14, 2016

Country risk is also incorporated into the analysis of operating performance and business profile. Inflation, the degree of volatility of business cycles, and the level of development of financial markets could impact earnings stability. Additionally, ease of business, contract enforceability, political stability, and economic conditions could affect normal business processes.

Operating performance The evaluation of operating performance can change the baseline ICR up as much as two notches or down as much as three notches. For property and casualty companies, some key profitability measures are:

Underwriting performance: loss ratio, expense ratio, combined ratio, and operating ratio

Investment performance: net yield and pre-tax total return

Total operating earnings: pre-tax operating return on revenue and operating ROE

For life and health companies, some key performance measures are:

Changes in premiums and reserves

Investment performance: net yield and pre-tax total return

Total operating earnings: net operating gain to assets, net operating gain to revenue, and operating ROE



Benchmarks can be based on the industry composite, rating levels, stock versus mutual, or other factors determined by the analyst.


Very strong +2

Historical operating performance is exceptionally strong and consistent

Trends are positive and prospective operating performance is expected to be exceptionally strong

Volatility of key metrics is low

Strong +1

Historical operating performance is strong and consistent Trends are neutral/slightly positive and prospective operating

performance is expected to be strong Volatility of key metrics is low to moderate

Adequate 0 Historical operating performance and trends are neutral Prospective operating performance is expected to be neutral Volatility of key metrics is moderate

Weak -1

Historical operating performance is poor Trends are neutral/slightly negative and prospective operating

performance is expected to be poor Volatility of key metrics is high

Very weak -2 to -3

Historical operating performance is very poor Trends are negative and prospective operating performance is

expected to be very poor Volatility of key metrics is high




Business profile A company’s business profile can increase or decrease the ICR by up to two notches. A.M. Best will assess a company’s market leadership position, brand recognition, degree of competition, distribution channels, product and geographic diversification, pricing sophistication, data quality, and management capabilities.


Very favorable +2

Market leadership position is unquestionable, demonstrated, and defensible with high brand recognition

Distribution is seen as a competitive advantage Business lines are non-correlated and generally lower risk Management capabilities and data management are very strong

Favorable +1

Market leader with strong business trends Good control over distribution Diversified operations in key markets that have high to moderate barriers

to entry with low competition Strong management team that is able to meet projections and utilize data

effectively

Neutral 0

Not a market leader, but is viewed as competitive in chosen markets Some concentration and/or limited control of distribution Moderate product risk but limited severity and frequency of loss Use of technology is evolving and its business spread of risk is adequate

Limited -1

Lack of diversification in geographic and/or product lines Control over distribution is limited and undifferentiated Faces high/increasing competition with low barriers to entry and elevated

product risk Management is unable to utilize data effectively or consistently in

business decisions

Very limited -2

Faces high competition and low barriers to entry High concentration in commodity or higher-risk products with very limited

geographic diversity Weak data management Country risk may factor into its elevated business profile risks




Enterprise risk management Strong ERM can increase the ICR by up to one notch whereas weak ERM can decrease the ICR by up to four notches. A.M. Best will be evaluating risk management capabilities and the risk profile of the company. A Risk Impact Worksheet is used in the assessment, which contains ten categories of risk that are measured against risk management capabilities. These categories are: product/underwriting, reserving, concentration, reinsurance, financial flexibility, investments, management, operational, legislative/regulatory/judicial/economic, and risk appetite/stress testing.

ERM assessment Notches Key characteristics

Very strong +1 The insurer's ERM framework is sophisticated, time/stress-tested and embedded across the enterprise. Risk management capabilities are excellent and are suitable for the risk profile of the company.

Adequate 0 The insurer's ERM framework is well-developed and is adequate given the size and complexity of its operations. Risk management capabilities are good and are adequate for the risk profile of the company.

Weak -1 to -2 The insurer's ERM framework is emerging and management is still developing formal risk protocols. Risk management capabilities are insufficient given the risk profile of the company.

Very weak -3 to -4 There is limited evidence of a formal ERM framework in place. Risk management capabilities contain severe deficiencies relative to the risk profile of the company.


Comprehensive adjustment A.M. Best expects the vast majority of ratings will not contain a comprehensive adjustment, but allows the flexibility to modify the ICR by one notch for extenuating circumstances.


Positive +1 The company has uncommon strengths that exceed what has been captured throughout the rating process.

None 0 The company's strengths and weaknesses have been accurately captured throughout the rating process.

Negative -1 The company has uncommon weaknesses that exceed what has been captured throughout the rating process.




Rating enhancement A non-lead rating unit may receive a lift or drag adjustment to their rating based on factors such as integration, strategic importance, and contribution to the overall enterprise.

Rating enhancement Notches Key characteristics

Typical Lift +1 to +4 The non-lead rating unit either receives explicit support from the broader organization or is deemed materially important within the broader organization as demonstrated by its level of integration.

Neutral 0 The non-lead rating unit does not have explicit support from the broader organization and is not considered materially important within the organization.

Typical Drag -1 to -4 The non-lead rating unit is negatively impacted by its association with the weaker affiliates of the broader organization.


At the conclusion of this process, a recommended ICR is presented to the ratings committee, which then determines the final outcome. As shown on page 7, the ICR is mapped to an FSR level. A.M. Best will include the keyword assessment for each component in companies’ published reports. For example, a company’s A.M. Best report may include descriptors like ‘strong’ for balance sheet strength, ‘adequate’ for operating performance and ‘favorable’ for business profile.

Impact of new criteria on ratings A.M. Best has indicated they do not expect many rating upgrades or downgrades from the criteria changes. However, some companies may be adversely affected by the change in the BCAR model or BCRM. Common attributes we see from companies most impacted include:

Companies with low current BCAR scores relative to rating level; They have less room to absorb the impact of more conservative factors under the draft BCAR model, especially at higher confidence intervals

Higher rated companies (A- or above) whose current catastrophe reinsurance program exhausts near the 100-year return period; They will likely see a material drop in capital adequacy at higher confidence intervals

Companies with aggressive investment strategies or high asset leverage; The risk charges for common stocks and bonds are multiples of the current BCAR model

Health companies that are thinly capitalized under the current model may be concerned about the increase in morbidity premium factors

Annuity writers as both major components of their BCAR increased: asset factors and interest rate risk factors



Timeline—What comes next? A.M. Best will be updating all of the other criteria papers in the next year to coincide with the BCAR and BCRM updates. This will include criteria for terrorism, holding companies, surety, title, etc. All new criteria procedures and methodologies are expected to be implemented concurrently by late 2017. However, the timing will depend on the comments received from the industry. Aon Benfield will continue to discuss the proposed criteria with clients and provide feedback to A.M. Best.

A.M. Best – Mortgage criteria In March of 2017, A.M. Best issued new criteria for rating mortgage insurers (MI), as well as draft criteria related to the capital treatment for companies reinsuring mortgage credit risk or primary mortgage insurers business. Currently, A.M. Best does not rate any primary mortgage insurers, but once this new criteria is finalized, A.M. Best will look to rate primary mortgage insurance companies. However, given that many traditional reinsurers are insuring GSE (Fannie Mae and Freddie Mac) mortgage credit risk and primary mortgage insurance business, the primary interest for the new criteria relates to the proposed capital treatment related to the transactions for multi-line companies that A.M. Best currently rates.

A.M. Best outlined two approaches for determining capital requirements for insurance credit risk transfer programs:

• Factor based approach to determine stressed loss scenarios based upon credit score of borrowers and loan-to-value ratios (if cumulative exposure is less than USD500 million or less than 10 percent of surplus)

• Full modeling approach using loss output from a third party vendor model

The stressed losses based upon the selected approach above will be reduced by expected premiums from the layers leading a net loss amount. This net loss will be added to B6-Premium risk charge within BCAR, which will be subject to a diversification credit with B6 and a covariance benefit within the overall net required capital calculation. As a result, the marginal capital requirements from writing GSE mortgage credit insurance will depend upon a company’s current BCAR risk drivers. The comment period for draft mortgage insurance criteria is open until May 1, 2017.

Standard & Poor’s (S&P) Standard & Poor’s has released no new criteria reports since September 2015. Currently, there is one open request for comment on proposed revisions to its criteria for linking short-term and long-term ratings. According to S&P’s request for comment, “the proposed revisions create a general cross-sector framework for linkages between short-term and long-term rating, by expanding the scope of our criteria, ‘Methodology for Linking Short-Term Ratings for Corporate, Insurance, and Sovereign Issuers,’ [that was] published on May 7, 2013.” The scope expansion will include corporate issuers with characteristics of finance companies (e.g. equipment leasing companies and captive finance companies) to this methodology. However, S&P is not proposing any changes to the mapping of short-term to long-term ratings for corporate, insurance, or sovereign issuers. The purpose of this proposed revision is to introduce a standard approach to present the mapping of the ratings.



Moody’s Since September 2015, Moody’s published revised rating methodologies for global title insurers, global life insurers, financial guarantors, global trade credit insurers, global reinsurers, mortgage insurers, US health insurance companies, and global property and casualty insurers. The revisions clarify the discussion on their approach to rating high trigger contingent capital securities. According to Moody’s, “contingent capital securities are typically deeply subordinated securities, with or without coupon suspension mechanisms, that convert to equity or suffer a principal write-down either at the point of non-viability or failure (non-viability securities) or in advance of it (‘high trigger’ securities).” Moody’s approach to rating high trigger contingent capital includes the following steps:

1. modeling the probability of a trigger breach and mapping it to a model-implied rating

2. capping the model-implied rating to the level of the insurer’s traditional security rating

3. finalizing or adjusting the rating based on Rating Committees’ judgment

Moody’s has made no rating changes due to this update. In addition, Moody’s revised their cross-sector rating methodology, “Financial Statement Adjustments in the Analysis of Non-Financial Corporations.” The revisions clarified the following: that capitalized interest is reclassified from investing activities to operating activities in the cash flow statement; that capitalized development costs (other than software) are operating expenses; and that reverse factoring arrangements are an example of a non-standard adjustment.

Fitch In September 2016, Fitch Ratings published updates to its methodology for rating insurance companies, which are primarily clarifications to pre-existing methodology. The updates include the following:

Section I (Key credit factors)—Fitch clarified the industry profile and operating environment factor to better reflect different market specifics; the capitalization and leverage factor to clarify the treatment of match-funded debt and the addition of the Prism US Life Insurance Capital Model; the investment and asset risk factor to clarify the treatment of insurers in speculative-grade countries; and the business profile (market position and size/scale) factor to clarify the broad and significant influences to a company’s creditworthiness

Section II (Weighting of key credit factors in final rating) – Fitch clarified how a rating committee employs judgment in setting factor weightings

Section III – no updates

Section IV (Hybrid securities: treatment in ratios/equity credit) – Fitch clarified that a hybrid issuance on a intergroup basis can negate equity credit and that it would apply a regulatory override for capital instruments that receive credit under Solvency II

Section V (Group rating methodology) – Fitch clarified the definition of core strategic importance, support agreement types, and support in emerging markets

Section VI (Notching: debt, hybrid, IFS rating, and holding companies) – Fitch updated their criteria for the notching of insurance revenue bonds

Section VII (Start-up and runoff organizations) – Fitch updated their criteria to reflect how rarely they assign a start-up Insurer Financial Strength (IFS) rating and Issuer Default Rating (IDR) above the ‘BBB’ category without parent or group support



In January 2017, Fitch released an exposure draft that focuses on the application of the 12 key credit factors discussed in Section I of Fitch’s insurance master criteria to the mortgage insurance sector. The proposed additions to its master insurance rating criteria include the following:

Industry profile and operating environment – Fitch expects Australian mortgage insurers and US mortgage insurers will likely be rated in the ‘A’ and ‘BBB’ categories, respectively

Capitalization and leverage – Fitch does not plan to develop or use a proprietary model to supports its mortgage insurance analysis. Instead, Fitch proposes to evaluate mortgage insurer’s capitalization by using a combination of traditional insurance operating leverage analysis and evaluating the mortgage insurer’s performance relative to their risk and nonrisk-based (and government-sponsored enterprise) regulatory capital requirements.

Financial performance and earnings – Fitch’s combined ratio benchmarks for mortgage insurers are more conservative than for other non-life insurers due to the increased volatility of underwriting results.

Fitch plans to add these new criteria elements to its insurance master criteria report to support ratings in the mortgage insurance sector.

Demotech In February of 2017, Demotech suspended their published guidance for Florida insurers, which included thresholds for premium to surplus ratios, risk based capital ratios, underwriting income, and adverse development metrics, etc. Demotech cited concerns over 2016 financial results coupled with an unfavorable operating environment in Florida due to the assignment of benefits issue and recent court cases that go against industry standards for the rest of the United States. Demotech noted that companies with less than USD20 to 25 million of capital may face ratings pressure.

Companies at risk of downgrade responded by enhancing their rating position through capital contributions, surplus notes, or acquisitions. Companies that are downgraded from the ‘A’ rating category by Demotech will not meet the insurer requirements as currently outlined by Fannie Mae or Freddie Mac for the secondary mortgage market at this time.



Regulatory Developments Regulatory developments remain an important topic for all companies. Many companies faced new regulatory requirements in 2016 such as Solvency II, C-ROSS, and US Own Risk Solvency Assessment (ORSA). Across all regions, regulators continue to increase the capital requirements by raising minimum capital standards, refining capital models, reevaluating catastrophe risk exposure, and expanding their reviews to assess risk management processes. The impact of these actions is closing the gap between rating agency and regulatory capital requirements.

North America

United States In 2016, five additional states joined the list of states with Own Risk Solvency Assessment (ORSA) legislations. As of publication release date, 40 states adopted the ORSA requirements, while one additional state has pending legislations for adoption. The US National Association of Insurance Commissioners (NAIC) is anticipating all states will adopt the model act into law by end of next year. Approximately 200 reports were filed during 2015 and it is estimated 300 reports will be filed on an annual basis once the model act is adopted by all states. For companies that filed their reports during 2015, state regulators are in process of providing feedback prior to the 2016 submissions. Among the key comments provided on 2015 reports are quantifying critical risk exposures and stress testing. Companies were asked to demonstrate sufficient capital in stress scenarios and articulate rationales for selecting particular stress events.

The NAIC is fairly close on adopting the final implementation date for the risk based capital (RBC) catastrophe risk charge. The targeted effective timeframe is year-end 2017 reporting year, which will be filed in March 2018. Thus far, key approaches for calculating the RBC risk charge agreed upon by the NAIC include:

Separate charge applied to 1-in-100 year modeled hurricane and earthquake loss net of reinsurance

Catastrophe charges subject to the covariance adjustment

Contingent credit risk charge applied at 4.8 percent on reinsurance recoverables

Allow companies to report both Aggregate Exceedance Probability (AEP) and Occurrence Exceedance Probability (OEP) modeled results

States adopted ORSA Model AL, AK, AR, AZ, CA, CO, CT, DE, FL, GA, HI, IA, IL, IN, KS, KY, LA, ME, MI, MN, MO, MT, ND, NE, NH, NJ, NY, NV, OH, OK, OR, PA, RI, TN, TX, VA, VT, WA, WI, WY States with actions pending MA



Prior to the catastrophe risk charge being officially included in the RBC formula, a few more aspects need to be finalized:

Finalize models (internal and external) that can be used for filing purposes

If additional perils should be in the catastrophe risk charge

Whether to add a factor to artificially increase OEP results to approximate AEP results

While the inclusion of a catastrophe charge lowers RBC results across the board, we estimate this only has a meaningful impact on a small portion of US companies. Many Florida homeowners companies will experience a material drop in RBC once the catastrophe risk charge is adopted and may likely consider increased use of reinsurance to manage regulatory capital requirements.

Canada The Canadian Regulator, Office of the Superintendent of Financial Institutions (OSFI), focused on monitoring the new Minimum Capital Test (MCT) framework and reviewing the best practices for the key guidelines released in the recent years. In 2016, two guidelines were released for P&C companies:

Operational Risk Management (Guideline E-21), issued in June 2016, is to be implemented no later than June 2017. It has four principles: operational risk management framework, operational risk appetite statement, three Lines of Defense, and identification and assessment of operational risk.

IFRS 9 Financial Instruments and Disclosures for Federated Regulated Entities (FREs), issued June 21, 2016, permits OSFI to promote the adoption by management and boards of FREs of policies and procedures designed to control and manage risk.

OSFI released a letter to tighten the supervisory expectations for mortgage underwriting on July 7, 2016, which reflected the concern on the Canadian housing market. In addition, a draft advisory on the capital requirement for federally regulated mortgage insurers was issued on September 23, 2016 and implemented on January 1, 2017. This ensures that mortgage insurers maintain sufficient levels of capital as the real estate market continues its price escalation.

Going forward, OSFI will review and refine catastrophic event preparedness as a result of increased frequency events, such as the Fort McMurray wildfire in 2016, to ensure compliance with stress testing and capital requirements.



Europe, Middle East, and Africa

Europe After a long development period, the introduction of the new solvency regime has proceeded relatively smoothly, albeit with the aid of certain ‘transitional measures.’ It is designed mainly to help life insurers address the challenges of the low interest rate environment. The change was easiest for larger, more sophisticated (re)insurers that were already managing their businesses in accordance with S2 principles and with regard to significantly higher capital thresholds required by the rating agencies. Many companies have achieved internal model approval, allowing them to benefit from diversification in their Solvency Capital Requirement (SCR) calculations. Smaller companies have found converting to the new regime more difficult, with greater pressure on unrated mutuals, monoline insurers, and captives that lack diversification and do not have easy access to new funds.

The introduction of S2 has potentially important impacts on reinsurance supply and demand across the EU, as outlined below:

S2 has been a catalyst for improved risk management across the EU (re)insurance industry, driven by the requirement for all firms to conduct an ORSA

The mark-to-market nature of the regime has increased the volatility of capital positions

EU firms underwriting capital-intensive products will increasingly use hedging strategies to mitigate their exposures

High levels of uncertainty within legacy reserves drive higher regulatory capital requirements

Capital loadings will discourage EU (re)insurers from buying cover from reinsurers based in a territory that is neither subject to S2 nor deemed S2 equivalent

For reinsurance purposes, currently only Bermuda, Japan, and Switzerland are deemed equivalent (negotiations between the EU and the US are in progress)

EU cedents will need to carefully consider the extent that any collateral posted by the reinsurer will enable it to take credit for the reinsurance

Reinsurance will need to demonstrate genuine risk transfer, limiting some forms of financial reinsurance that have been used in the past

S2 will recognize securitization and derivatives as effective risk mitigation techniques, which could help to stimulate further interest from EU sponsors

S2 formalizes the advantages of large diversified groups, which may act as a catalyst for M&A



Middle East In Oman, the insurance sector has witnessed legislative and regulatory developments this year such as the amendments to the Motor Vehicle Insurance Law, the Unified Motor Insurance Policy, and insurance broker’s regulation. The Saudi Monetary Agency (SAMA), the regulator of the Saudi Arabian insurance market, issued two new regulations:

Actuarial work regulation for insurance and reinsurance companies

Regulations for branches and points of sale annual expansion for insurance and reinsurance, brokerage, and agency companies

It is expected that regulations will promote the level of services provided by the branches or points of sale. New regulations and guidelines for property, fire, and business interruption risks have been introduced effective January 2, 2016. The new regulations prevent insurance companies from providing a quotation or cover without having adequate underwriting information and standard minimum deductibles.

Although minimum capital requirements in the United Arab Emirates (UAE) will remain at Dh100 million (USD27.7 million) for insurers and Dh250 million (USD68.1 million) for reinsurers, the financial regulations require that insurers maintain a minimum guarantee fund not less than a third of their solvency capital requirement. Solvency margins must be calculated using the Insurance Authority’s (IA) amended template, which was released in September 2015. Companies are required to take underwriting, investment, credit, and operational risks into account when calculating their solvency capital requirement. Companies have been given until January 29, 2018 to bring the changes into effect, and are required to notify the IA in the event of non-compliance. This puts the UAE’s insurance industry broadly in line with proposals introduced under Europe’s Solvency II Directive.

Africa Effective year-end 2015, the Ghanaian Regulator implemented various amendments to the solvency framework, capital requirements as well as the introduction of a Financial Condition Report (FCR). These renovations were required for a number of reasons with the main objective being to ensure that the Ghana Insurance Industry was keeping up to date with international standards and best practices. All insurers are required to have a Capital Adequacy Ratio (CAR) in excess of 150 percent. There was a transition period giving insurers time to attain this ratio by December 31, 2016.

In Kenya, the Government seeks to give more regulatory authority to the Insurance Regulatory Authority (IRA) and not the Minister of Finance (now known as the Cabinet Secretary for National Treasury).



Some of the other amendments with respect to the minimum capital requirements are highlighted below:

Minimum capital requirements, greater of risk-based capital, determined by the IRA, from time to time, or:

Type of insurer Capital General insurance business

KES 600m (increase from

KES 300m)

or 20 percent of the net-earned premiums of the preceding financial year

Long term insurance business

KES 400m or 5 percent of the liabilities of the life business for the

financial year

Re-insurance business (general)

KES 1B (increase from

KES 500m)

or 20 percent of the net-earned premiums of the preceding financial year

Re-insurance business (long term)

KES 500m (increase from

KES 300m)

or 5 percent of the liabilities of the life business for the financial year

Source: http://www.oraro.co.ke/alert/finance-act-2015-key-changes-made-to-the-insurance-actia/

The Tunisian insurance sector is regulated by the General Committee on Insurance (Comité Géneral des Assurances, CGA), which is a unit of the Ministry of Finance, and by the 1992 Insurance Code. The industry has entered a period of significant regulatory change following the completion of an EU-funded strategic review of the insurance market and the CGA’s subsequent announcement of a five-year reform program. Due to be completed in 2019, the program gradually introduces changes to industry regulations, such as new obligations for companies to submit auditors’ reports to the regulator and new requirements that they establish risk management committees and increase capital levels. The changes will also see the establishment of an ombudsman to examine disputes between firms and their clients. Another area that is being addressed under the reforms is risk management, which some observers argue is underdeveloped in Tunisia. The reforms will require Tunisian insurance firms to establish risk management committees.

Insurance companies in Zimbabwe will soon be required to increase their minimum capital thresholds by between 66 and 150 percent as the Insurance and Pension Commission (IPEC) moves to enforce the new minimum capital requirements that were announced by Finance Minister Patrick Chinamasa in the 2016 National budget statement. Minister Chinamasa proposed to increase minimum capital requirements for short-term insurers and funeral assurers from USD1.5 to 2.5 million and life assurers from USD2 to 5 million. The industry is required to meet the new requirements by December 31, 2016. The increased minimum capital requirements are expected to improve underwriting capacity and contain insurance business within the country.



Asia Pacific Throughout 2016 and continuing into 2017, the main theme of regulatory change in Asia Pacific was enhanced requirements on regulatory capital and risk management.

Effective January 1, 2016, the China Risk Oriented Solvency System (C-ROSS) was formally implemented and applies to all three pillars of C-ROSS: quantitative capital requirements, qualitative supervisory requirements, and market discipline mechanisms. In Hong Kong, a 3-pillar RBC regime is being built, although implementation dates have not yet been determined. In India, the Insurance Regulatory and Development Authority (IRDA) set up a committee in June 2016 to study the approach to move towards RBC and liability valuation.

In countries where RBC has already been in place, the regulators are reviewing the system and making enhancements. In Japan, the Financial Service Agency (FSA) decided to conduct field tests covering all insurance companies with the aim of considering the economic value-based evaluation and supervisory method. This is the third field test following prior tests conducted in June 2010 and June 2012. In Singapore, the Monetary Authority of Singapore (MAS) issued the third RBC 2 consultation paper on proposed revisions to the RBC framework for insurers, taking into account feedback from the industry. In Thailand, the Office of the Insurance Commission (OIC) is building the RBC 2 regime. In the Philippines, the Insurance Commission (IC) is introduced a new RBC framework on December 2016 that requires a minimum RBC ratio of 100 percent.

Regulatory requirements on risk management have also been upgraded. As the industry became accustomed to the new regulatory capital requirements in China, the regulator began enforcing qualitative supervisory requirements, thus motivating insurers to improve their risk management practices. In Japan and Singapore, the regulators have implemented the ORSA requirement. In September 2016, Japan FSA published results of ERM assessments based on ORSA reports and ERM hearings, with the results classified into Assessment Levels 1 through 5. Less than 20 percent of insurers assessed are in the best two levels, Level 5 and 4.

Other notable regulatory trends in Asia Pacific include favorable treatment on domestic reinsurers and enhanced catastrophe risk management.

Caribbean Legislation and regulations are slowly moving forward with few final changes in guidelines occurring in 2016.

In Antigua, the Financial Services Regulatory Commission (FSRC) announced in early December 2015 that a new risk-based supervisory framework would be introduced to govern the activities of insurance companies. In Bermuda, the Bermuda Monetary Authority (BMA) continues to enhance their solvency requirements.

The Cayman Islands Monetary Authority (CIMA) issued Statement of Guidance as follows:

Corporate Governance, issued February 2016

Guidance for Licensees seeking approval to use an Internal Capital Model (“ICM”) to calculate the Prescribed Capital Requirement (“PCR”), May 2016



Latin America In Argentina, a new administration in the Superintendencia de Seguros has increased the minimum capital requirements for insurers and local reinsurers. Additionally, the local reinsurance market will likely return to a partial or totally open market as it was in the past. These will lead to an increase in reinsurance demand and supply.

In Brazil, 2017 sees the introduction of resolution CSN 322/2015, which increases the intragroup limitation from 20 to 30 percent and reduces the obligatory local reinsurer cession from 40 to 30 percent. This is only the start of progressive changes that will continue until 2020. Separately, A.M. Best lowered Brazil’s country risk tier assessment from ‘3’ to ‘4’. While this is not expected to affect many ratings, it will lead to higher asset capital charges for local companies.

Chile is about to release new regulations making it mandatory for all insurers to have a written reinsurance policy, which is properly supervised and approved by their boards. The adequacy of earthquake catastrophe reserve requirements based upon CRESTA zone exposures is also being reviewed. Any change in approach could impact reinsurance demand going forward.

There were no large changes for the Mexican market during 2016. Reinsurance continues being governed under LISF (Insurance and Surety Law) and the Unified Insurance and Surety Regulations (CUSF) established in April 2015, which incorporated Solvency II.



Looking Forward: Key Topics for 2017 As companies continue to operate within a very competitive market, there will be a number of key rating agency and regulatory themes when looking forward into 2017:

Stochastic BCAR: Global implementation of all new criteria is expected in late 2017. Companies globally are receiving their stochastic BCAR output under the proposed framework to review. With the majority of companies in our sample population falling above the 10 and 25 percent thresholds to receive the top two BCAR assessments, we expect that the industry will focus on the 99.5 and 99.6 confidence intervals. This may change the way companies manage their catastrophe risk with the 200 or 250 year return period used for these assessments. Additionally, US property & casualty companies have had an additional 8 months to understand the proposed framework with the initial release of their models in March of 2016. Life & health and non-US companies are in the beginning phases of understanding what these changes mean for their rating.

Rising interest rates: On December 14, 2016, the US Federal Reserve raised its benchmark interest rate by 0.25 percent, to a range of 0.50 to 0.75 percent, reflecting the strengthening US economy. Rising interest rates will result in unrealized losses on bonds, negatively impacting earnings, and reported capital positions. In addition, other investment opportunities will begin to look relatively more attractive to investors.

Personal lines segment remains fiercely competitive: Auto premium could compress over time as autonomous cars are further developed. Aon Benfield estimates industry pure premiums will fall 20 percent below their 2015 levels by the year 2035, and fall by more than 40 percent by the time that autonomous vehicles reach full adoption by 2050.

Increasing global regulation: Regulators around the world continue to evolve their criteria, including increasing capital requirements, catastrophe exposure thresholds, and evaluations under risk based capital models. Additionally, regulation is becoming more global in nature with the rules in some regions impacting other countries that want to do business there.

How Aon Benfield Can Assist Our team continues to be in close discussions with all rating agencies to assist our clients in understanding how changing criteria impacts their business. Please contact your Aon Benfield broker or Aon Benfield Analytics professional on the contact information page to discuss these important topics.



Appendix I—Investment Risk Factors Capital factors for other asset classes were not disclosed in the Universal BCAR paper. This table represents A.M. Best’s US stochastic-based investment factors.

Typical investment capital factors Reserve risk factor Current VaR 95 VaR 99 VaR 99.5 VaR 99.6 Public Common Stocks 15.0% 25.0% 39.0% 45.0% 46.0% Preferred Stock - Public 15.0% 25.0% 38.0% 43.0% 44.0% Preferred Stock – Class 1 1.0% 0.6% 0.9% 1.0% 1.1% Preferred Stock – Class 2 2.0% 3.3% 4.3% 4.6% 4.7% Preferred Stock – Class 3 4.0% 9.9% 11.2% 11.6% 11.7% Preferred Stock – Class 4 4.5% 20.9% 22.3% 22.8% 22.9%

Preferred Stock – Class 5 10.0% 42.1% 42.4% 42.6% 42.7%

Preferred Stock – Class 6 30.0% 54.2% 54.6% 54.7% 54.8% Affiliated Stock (Private) 100.0% 100.0% 100.0% 100.0% 100.0% Mortgage Loans 5.0% 3.3% 4.9% 5.4% 5.6% Real Estate 10%/20% 12.0% 17.5% 19.5% 20.2% Other Investments 20.0% 27.5% 41.8% 47.3% 48.4%

Source: A.M. Best Draft Understanding BCAR for US Property/Casualty Insurers – November 14, 2016

Below is a chart A.M. Best shared in the “Understanding Universal BCAR” paper that shows the bond risk factors at the 99.6 CI compared to the current model.

VaR 99.6

Rating Current 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year aaa 0.20% 0.00% 0.05% 0.10% 0.14% 0.19% 0.23% 0.27% 0.30% 0.32% 0.38% aa+ 0.50% 0.09% 0.21% 0.35% 0.45% 0.54% 0.61% 0.68% 0.71% 0.77% 0.82% aa 0.50% 0.18% 0.40% 0.61% 0.77% 0.90% 1.00% 1.10% 1.15% 1.21% 1.27% aa- 0.50% 0.28% 0.59% 0.87% 1.11% 1.29% 1.40% 1.53% 1.58% 1.64% 1.72% a+ 1.00% 0.48% 0.99% 1.42% 1.77% 2.02% 2.21% 2.37% 2.42% 2.50% 2.61% a 1.00% 0.58% 1.18% 1.70% 2.09% 2.39% 2.60% 2.78% 2.83% 2.93% 3.03% a- 1.00% 0.71% 1.42% 2.01% 2.48% 2.85% 3.07% 3.25% 3.32% 3.41% 3.52% bbb+ 2.00% 1.17% 2.31% 3.26% 4.00% 4.57% 5.00% 5.31% 5.42% 5.60% 5.79% bbb 2.00% 1.32% 2.61% 3.64% 4.48% 5.10% 5.58% 5.91% 6.02% 6.19% 6.39% bbb- 2.00% 1.62% 3.19% 4.42% 5.40% 6.13% 6.67% 7.02% 7.17% 7.33% 7.54% bb+ 4.00% 2.47% 4.76% 6.67% 8.26% 9.51% 10.53% 11.23% 11.78% 12.24% 12.67% bb 4.00% 2.82% 5.40% 7.52% 9.28% 10.65% 11.73% 12.50% 13.02% 13.51% 13.96% bb- 4.00% 5.10% 9.48% 12.89% 15.50% 17.51% 18.82% 19.66% 20.16% 20.56% 20.89% b+ to b- 4.50% 7.43% 13.44% 18.29% 22.13% 25.09% 27.25% 28.79% 29.93% 30.61% 30.95% ccc+ to ccc- 10.00% 25.46% 38.31% 44.42% 46.84% 47.30% 46.71% 45.59% 44.21% 42.71% 41.18% cc to cc+ 10.00% 29.70% 44.69% 51.82% 54.64% 55.18% 54.49% 53.18% 51.58% 49.83% 48.05% d 30.00% 33.94% 51.08% 59.23% 62.45% 63.06% 62.27% 60.78% 58.94% 56.95% 54.91%



Source: A.M. Best Draft Understanding Universal BCAR – November 14, 2016

Appendix II—US P&C Reserve Capital Factors This table compares current baseline factors to the typical factors disclosed in the criteria paper for the large size category (various thresholds for reserves). Aon Benfield computed typical factors under the current model and calculated the difference from the current model to the factors for the 99 confidence interval.

Typical reserve capital factors - large

Reserve risk factor Current typical*

VaR 95

VaR 99

VaR 99.5

VaR 99.6

Change from current to 99

Home / Farmowners .261 .205 .306 .346 .357 +.045 Pers Auto Liab .304 .151 .223 .250 .259 -.081 Comm'l Auto Liab .267 .178 .264 .297 .308 -.003 Workers Comp .290 .207 .308 .347 .359 +.018 Comm'l Multi Peril .287 .209 .312 .352 .365 +.025 Med Mal (Occ) .431 .267 .406 .461 .478 -.025 Med Mal (C/M) .330 .211 .318 .360 .373 -.012 Special Liab .318 .186 .277 .312 .323 -.041 Other Liab (Occ) .322 .279 .422 .478 .497 +.100 Other Liab (C/M) .322 .262 .396 .448 .465 +.074 Prod Liab (Occ) .355 .325 .493 .559 .580 +.138 Prod Liab (C/M) .269 .252 .381 .432 .448 +.112 Property .343 .207 .308 .348 .361 -.035 Auto Phys Damage .281 .170 .252 .283 .292 -.029 F&S/Fin Guar .384 .234 .353 .399 .413 -.031 Other .377 .188 .280 .315 .326 -.097 International .367 .209 .312 .352 .365 -.055 Reinsurance A .312 .218 .326 .369 .382 +.014 Reinsurance B .366 .298 .452 .512 .531 +.086 Reinsurance C .284 .246 .372 .422 .436 +.088 Warranty .373 .170 .252 .283 .293 -.121

Source: A.M. Best Draft Understanding BCAR for US Property/Casualty Insurers – November 14, 2016 * Aon Benfield calculated typical capital factors under the current model



Appendix III—US P&C Premium Capital Factors This table compares current baseline factors to the typical factors disclosed in the criteria paper for the large size category (over $30M of premium). Aon Benfield computed typical factors under the current model and calculated the difference from the current model to the factors for the 99 confidence interval.

Typical premium capital factors - large

Premium risk factor Current typical*

VaR 95

VaR 99

VaR 99.5

VaR 99.6

Change from current to 99

Home / Farmowners .416 .257 .388 .440 .456 -.028 Pers Auto Liab .303 .189 .282 .318 .329 -.021 Comm'l Auto Liab .322 .214 .320 .362 .375 -.002 Workers Comp .271 .232 .349 .394 .410 +.078 Comm'l Multi Peril .305 .235 .353 .400 .414 + .048 Med Mal (Occ) .343 .273 .416 .472 .491 +.073 Med Mal (C/M) .294 .260 .396 .450 .466 +.102 Special Liab .305 .221 .333 .377 .392 +.028 Other Liab (Occ) .290 .242 .366 .414 .430 +.076 Other Liab (C/M) .271 .247 .375 .424 .440 +.104 Prod Liab (Occ) .280 .293 .448 .509 .529 +.168 Prod Liab (C/M) .243 .279 .426 .485 .502 +.183 Property .367 .237 .358 .406 .420 -.009 Auto Phys Damage .271 .168 .249 .280 .290 -.022 F&S/Fin Guar .243 .220 .330 .373 .387 +.087 Other .259 .211 .316 .357 .371 +.057 International .353 .234 .353 .400 .414 .000 Reinsurance A .387 .242 .367 .416 .431 -.020 Reinsurance B .316 .258 .393 .447 .462 +.077 Reinsurance C .389 .231 .351 .399 .414 -.038 Warranty .308 .176 .262 .296 .305 -.046

Source: A.M. Best Draft Understanding BCAR for US Property/Casualty Insurers – November 14, 2016 * Aon Benfield calculated typical capital factors under the current model



Appendix IV—Mortality Factors Current Proposed

Value in force Under 500k

500k to 4.5m

4.5m to 20m

20m to 25m

Under 500k

500k to 5m

5m to 25m

25m to 50m

Current: Industrial & Ordinary Life 0.15% 0.10% 0.075% 0.06% -- -- -- --

Current: Credit & Group Life 0.12% 0.08% 0.06% 0.05% -- -- -- --

VaR 95 -- -- -- -- 0.22% 0.09% 0.05% 0.02% VaR 99 -- -- -- -- 0.34% 0.14% 0.08% 0.05% VaR 99.5 -- -- -- -- 0.36% 0.15% 0.09% 0.05% VaR 99.6 -- -- -- -- 0.37% 0.16% 0.11% 0.06%

Source: A.M. Best Draft Understanding BCAR for US and Canadian Life/Health Insurers – November 14, 2016



Appendix V—US Life & Health Premium Capital Factors Typical premium capital factors - large

Reserve risk factor Current typical*

VaR 95

VaR 99

VaR 99.5

VaR 99.6

Change from

current to 99

Indiv Hosp Maj Med .150 .0147 .221 .250 .258 +.071 Indiv Hosp Indem ADD .080 .0154 .232 .263 .272 +.152 Indiv Medicare Supp .070 .070 .106 .120 .124 +.036 Indiv Medicare Adv Plus Choice .125 .088 .132 .149 .155 +.007 Indiv Medicaid .125 .179 .270 .306 .317 +.145 Indiv Medicare Part D .070 .126 .190 .213 .222 +.120 Indiv Medicare Part D Supp .350 .144 .217 .245 .253 -.133 Indiv Fee for Service .010 .074 .111 .125 .130 +.101 Indiv Disability – Non Can .200 .400 .450 .475 .500 +.250 Indiv Disability – Other IDI .100 .200 .225 .240 .250 +.125 Indiv Long Term Care .180 .250 .400 .500 .525 +.220 Indiv Dread Disease .120 .186 .282 .318 .330 +.162 Group Hosp Maj Med .090 .064 .097 .109 .113 +.007 Group Hosp Indem ADD .080 .142 .214 .242 .251 +.134 Group FEHBP .050 .025 .028 .029 .029 -.062 Group Dental .076 .119 .180 .203 .210 +.104 Group Vision .060 .085 .128 .144 .150 +.068 Group Disability - LTD .050 .150 .200 .225 .250 +.150 Group Disability – STD .050 .139 .210 .237 .246 +.160 Group Long Term Care .150 .200 .300 .400 .450 +.150 Group Dread Disease .120 .138 .208 .235 .243 +.088 Group Stop Loss and Min Prem .250 .119 .180 .203 .210 -.070 Group Lim Benefit .150 .141 .212 .239 .248 +.062 Group Student .100 .106 .159 .180 .186 +.059 Credit .120 .169 .256 .290 .301 +.136 Group Prem Equiv ASO Stop Loss .005 .005 .008 .009 .009

+.003

Workers’ Comp Carve Out Prem .400 .232 .349 .394 .410 -.051 All Other (Group & Indiv) .180 .189 .287 .325 .337 +.107

Source: A.M. Best Draft Understanding BCAR for US and Canadian Life/Health Insurers – November 14, 2016 *Current factors are often higher for a first threshold of premium; the factors displayed in this chart are for the amount over the threshold. For example, individual hospital and major medical is .25 for the first $50M of premium and .15 thereafter.



Appendix VI—US Life & Health Reserve Capital Factors Typical reserve capital factors – large

Line of business Current VaR 95 VaR 99 VaR 99.5 VaR 99.8 Group A&H N/A .125 .184 .206 .213 Credit A&H N/A .189 .281 .318 .329 Collectively Renewable N/A .156 .231 .260 .269 Non-Cancellable N/A .118 .173 .193 .200 Guaranteed Renewable N/A .146 .214 .241 .250 Non-Renewable N/A .196 .292 .330 .341 Other Accident N/A .198 .295 .333 .344 All Other .050 .213 .319 .361 .374 Workers Comp Carve-Out Liability

.386 .207 .308 .347 .359

Comprehensive N/A .134 .198 .222 .230 Medicare Supplement N/A .144 .212 .238 .247 Dental N/A .137 .202 .227 .234 Vision N/A .106 .155 .174 .179 Fed Employees N/A .004 .006 .007 .007 Title XVII Medicare N/A .148 .220 .248 .255 Title XIX Medicaid N/A .156 .232 .261 .270 Other Health N/A .196 .292 .329 .341

Source: A.M. Best Draft Understanding BCAR for US and Canadian Life/Health Insurers – November 14, 2016



Appendix VII—US Life & Health Interest Rate Risk (Assuming Matched Portfolio)

General account / separate account annuities Current VaR 95

VaR 99

VaR 99.5

VaR 99.6

Not subject to discretionary withdrawal General Account Inv Annuities Exc. Structured Settlements .0075 .0054 .0095 .0108 .0109

Structured Settlements .0175 .0211 .0271 .0293 .0297 G/A Guaranteed Investment, Experience Rated and Index Group Pensions .0150 .0127 .0212 .0241 .0243

All Other General Account Group .0150 .0163 .0270 .0307 .0311 Subject to discretionary withdrawal with market value adjustments

Individual and Group Annuities: Surrender Charges Expire During Year 1 .0165 .0197 .0299 .0336 .0340 Surrender Charges Expire During Year 2 .0100 .0175 .0275 .0307 .0312 Surrender Charges Expire During Year 3 .0085 .0175 .0275 .0307 .0312 Surrender Charges Expire After Year 3 .0075 .0147 .0251 .0293 .0297 Subject to discretionary withdrawal without market value adjustments

Individual and Group Annuities: Surrender Charges Expire During Year 1 .0235 .0261 .0379 .0454 .0456 Surrender Charges Expire During Year 2 .0175 .0259 .0358 .0406 .0415 Surrender Charges Expire During Year 3 .0160 .0259 .0358 .0406 .0415 Surrender Charges Expire After Year 3 .0150 .0199 .0328 .0373 .0378 Subject to discretionary withdrawal with no surrender charges

Individual and Group Annuities .0300 .0261 .0379 .0454 .0456 Source: A.M. Best Draft Understanding BCAR for US and Canadian Life/Health Insurers – November 14, 2016



Appendix VIII—Country Risk Tier Assessment Country Risk Tier Assessment

CRT-1 CRT-2 CRT-3 CRT-4 CRT-5 Australia Bermuda Anguilla Antigua & Barbuda Algeria Austria British VI Bahamas Azerbaijan Argentina Belgium Cayman Islands Barbados Bahrain Bangladesh Canada Chile China Brazil Belarus

Denmark Czeck Republic Curacao Brunei Darussalam Bhutan Finland Hong Kong Cyprus Bulgaria Bolivia France Ireland Iceland Colombia Bosnia & Herzegovina

Germany Italy Israel Costa Rica Cambodia Gibraltar Japan Kuwait Dominican Republic Ecuador Guernsey Liechtenstein Malaysia El Salvador Egypt

Isle of Man Macau Malta Guatemala Gabon Luxemburg New Zealand Mexico Indonesia Ghana Netherlands Poland Oman Jordan Honduras

Norway Slovenia Portugal Kazakhstan Jamaica Singapore South Korea Qatar Mauritius Kenya Sweden Spain St. Kitts & Nevis Morocco Laos

Switzerland Taiwan Saudi Arabia Panama Lebanon United Kingdom South Africa Paraguay Libya United States St. Lucia Peru Micronesia

St. Maarten Philippines Mongolia Thailand Romania Myanmar Trinidad & Tobago Russia Nepal

United Arab Emirates Sri Lanka Nicaragua

Tunisia Nigeria Turkey Pakistan Uruguay Papua New Guinea Vietnam Suriname Togo Ukraine Uzbekistan Venezuela

Source: A.M. Best Country Risk Tier Assessments – August 25, 2016



Contact Information Greg Heerde Head of Analytics, Americas Aon Benfield +1.312.381.5364 [email protected] Kathleen Armstrong Managing Director, US Rating Agency Advisory Aon Benfield +1.513.562.4508 [email protected] Sifang Zhang APAC Head of Rating Agency Advisory Aon Benfield +852.2861.6493 [email protected]

Patrick Matthews Global Head of Rating Agency Advisory Aon Benfield +1.215.751.1591 [email protected] Kelly Superczynski Head of EMEA Analytics Aon Benfield +1.312.381.5351 [email protected] Raymond Lui Canada & Caribbean Rating Agency Advisory Aon Benfield +1.416.598.7320 [email protected]

About Aon Benfield Aon Benfield, a division of Aon plc (NYSE: AON), is the world‘s leading reinsurance intermediary and full-service capital advisor. We empower our clients to better understand, manage and transfer risk through innovative solutions and personalized access to all forms of global reinsurance capital across treaty, facultative and capital markets. As a trusted advocate, we deliver local reach to the world‘s markets, an unparalleled investment in innovative analytics, including catastrophe management, actuarial and rating agency advisory. Through our professionals’ expertise and experience, we advise clients in making optimal capital choices that will empower results and improve operational effectiveness for their business. With more than 80 offices in 50 countries, our worldwide client base has access to the broadest portfolio of integrated capital solutions and services. To learn how Aon Benfield helps empower results, please visit aonbenfield.com.

© Aon Benfield Inc. 2017. All rights reserved. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. This analysis is based upon information from sources we consider to be reliable, however Aon Benfield Inc. does not warrant the accuracy of the data or calculations herein. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Benfield Inc. disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Members of Aon Benfield Analytics will be pleased to consult on any specific situations and to provide further information regarding the matters.

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Executive SummaryRating Criteria UpdatesA.M. BestStochastic-based BCAR model overview (All models)Investment risk (All models)P&C reserve and premium risk (US P&C and Universal Models)Catastrophe risk (US P&C and Universal Models)Mortality and morbidity risk (US List & Health and Universal Models)Interest rate and variable annuity market risk (US Life & Health and Universal Models)Best’s Credit Rating Methodology (BCRM)Balance sheet strengthHolding company impactCountry risk assessmentOperating performanceBusiness profileEnterprise risk managementComprehensive adjustmentRating enhancementImpact of new criteria on ratingsTimeline—What comes next?A.M. Best – Mortgage criteria

Standard & Poor’s (S&P)Moody’sFitchDemotech

Regulatory DevelopmentsNorth AmericaUnited StatesCanada

Europe, Middle East, and AfricaEuropeMiddle EastAfrica

Asia PacificCaribbeanLatin America

Looking Forward: Key Topics for 2017How Aon Benfield Can AssistAppendix I—Investment Risk FactorsAppendix II—US P&C Reserve Capital FactorsAppendix III—US P&C Premium Capital FactorsAppendix IV—Mortality FactorsAppendix V—US Life & Health Premium Capital FactorsAppendix VI—US Life & Health Reserve Capital FactorsAppendix VII—US Life & Health Interest Rate Risk (Assuming Matched Portfolio)Appendix VIII—Country Risk Tier AssessmentContact Information

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