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Aon Benfield: Rating Agency and Regulatory Changes Driven by Increasing ERM Expectations and Transparency

Posted on 12 Sep 12 by Annie George

Aon Benfield, the global reinsurance intermediary and capital advisor of Aon plc, this week launched its annual Evolving Criteria report, which reviews the latest developments in rating agency protocol and examines important regulatory issues affecting the industry.

The report, entitled Looking Back to Anticipate Change Moving Forward, highlights key rating agency criteria and regulatory developments – including rating agency Standard & Poor's proposed rating methodologies – and the increasing importance of Enterprise Risk Management (ERM) in ratings frameworks.

It also examines how economic capital models are being evaluated, the developments regarding Solvency II and the National Association of Insurance Commissioners (NAIC)'s Own Risk and Solvency Assessment (ORSA), and how ERM and increased transparency are common threads to many of the criteria changes.

In addition, the report reviews rating agency trends and industry outlooks revealing that several key topics have been driving rating agency discussions, including the natural catastrophe losses of 2011, catastrophe model updates, and concern over reserve adequacy. Also, the debt crisis In Europe, a softening pricing environment, and subdued investment returns are affecting insurers' profitability and leading to negative rating actions.

Kelly Superczynski, Aon Benfield Head of Global Rating Agency Advisory, said: "Across the multitude of rating agency methodology proposals and updates over the past year, we see a general move towards a requirement for ever more detailed financial analyses that include a greater volume of non-public data, with the aim of creating global consistency in terms of methodology application, as well as an increase in the overall transparency of the ratings process. Rating agencies and regulators continue to increase the importance and growing expectations of risk management for companies of all size and complexity.

Reinsurance has been a valuable risk management tool for companies to manage catastrophe exposure, capital requirements, earnings volatility and setting risk tolerances."

The report provides a global perspective on key criteria changes and also discusses specific developments in the regions of the United States, Europe and Asia Pacific. In addition to the key considerations of major rating agencies and regulators, the report looks at the trend towards GAAP and IFRS convergence in creating a common reporting standard and framework.