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A.M. Best Does Not Expect U.S. SIFI Designation to Impact Credit Ratings

Source: A.M. Best

Posted on 12 Aug 2013 by Neilson

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A.M. BestThe Financial Stability Oversight Council (FSOC) has proposed that several nonbank financial institutions be designated "systemically important financial institutions" (SIFIs). Designation as a SIFI subjects firms to regulation of their operations by the U.S. Federal Reserve. While companies designated as nonbank SIFIs can appeal the proposed designation, A.M. Best Co. expects that several large insurance entities ultimately will be regulated under the SIFI rules. A.M. Best also is reviewing the recently announced list of Globally Systemically Important Institutions and expects to issue commentary.

Best's Capital Adequacy Ratio (BCAR), which A.M. Best uses in the rating process to measure insurers' risk-adjusted capital levels (the relative level of capital required to support an insurer's risks to the level of capital held, adjusted for various factors), generally results in a more conservative view of required capital than most regulatory tests, which are designed primarily to assess risk of insolvency. Additionally, A.M. Best imposes a number of stress tests of insurers' capital, including multiple catastrophes or various interest-rate/equity market scenarios, to determine the adequacy of capital.

Given insurers' generally favorable levels of BCAR, A.M. Best expects minimal direct impact on an insurance company's capital as a result of a SIFI designation. However, to the extent that an insurance company must dividend out funds to meet an enterprise's need to reallocate capital to comply with SIFI requirements, there could be an adverse impact on that insurer's risk-adjusted capital. Any changes in investments made to reduce regulatory capital requirements or improve stress-test results would be expected to improve an insurer's risk-adjusted capital, based on BCAR.