On January 9, 2012, A.M. Best announced several changes to its 2011 statement year Property/Casualty Supplemental Rating Questionnaire (2011 SRQ) in advance of its full distribution to the insurance industry on January 27. Insurers will be required to return the completed SRQ by April 1, if not sooner, if their annual meetings are scheduled in the spring.
While the changes appear modest, we are issuing this Towers Watson Insights report to provide P&C insurers with our views on the rating and risk-adjusted capital implications of these new information requirements.
Overview of Best's SRQ Changes
A subset of the SRQ containing the new and revised questions is being made available on A.M. Best's website ahead of the January 27 release. These changes apply to:
Natural catastrophe probable maximum loss (PML) and deterministic loss estimates
Fixed-income portfolio analysis
Aging of uncollected premiums
Price monitoring
Financial projections
Consolidated surplus
With the exception of the Natural Catastrophe section, the remaining questions are relatively straightforward and should not create significant challenges to answer. Conversely, the new Natural Catastrophe PML questions require companies to provide greater detail on their catastrophe exposures, including management's view on the overall level of catastrophe exposure. This requires a very subjective response that will be critical to both risk-adjusted capital (Best's Capital Adequacy Ratio) and the overall rating. Therefore, management should fully understand, and be prepared to discuss and support, their responses with the analytical team at their next annual rating meeting.
Increased Scrutiny of Enterprise Risk Management (ERM) Responses
The 2011 changes will be supplemented with increased emphasis on ERM in Best's rating evaluations starting in 2012. Following the release of a new set of ERM questions in last year's SRQ, Best issued a special report, "Survey Reveals Leaders, Laggards in P/C Enterprise Risk Management," which benchmarked the responses. Towers Watson issued an advisory in October 2011, "The ERM Bar Is Raised Again," that provided insights and perspectives on Best's findings. Best's evaluation concluded that while the industry is making progress in its ERM efforts, there is still a long way to go. ERM responses form a crucial component of the rating evaluation even when ERM is not discussed in depth during the annual rating meeting.
For this year, Best has not made any changes to the ERM section of the SRQ. But unlike last year, Best's October 2011 benchmarking results communicate the rating agency's higher expectations for this rating cycle. We expect that A.M. Best's assessment of a company's ERM program and its ability to effectively manage the company's risk profile will increasingly influence rating determinations and required capital. Insurers should fully understand the background and implications of Best's new ERM questions and be prepared to discuss their ERM programs during their annual meetings.
Towers Watson's Assistance
If you would like to learn more about these recent developments and their potential future impact on ratings and the evaluation of risk-adjusted capital, we encourage you to join us for an upcoming webinar, Insights and Perspectives on Best's Latest SRQ Release, on Wednesday, February 22, at 11:00 a.m. ET. We will discuss:
Recent SRQ changes and potential impacts on ratings and risk-adjusted capital
Catastrophe Risk: Increased Transparency and Management's Point of View
Enterprise Risk Management: The Next Phase in Best's Assessment
Towers Watson's rating advisory group helps clients understand the context and intent of the information requested, and can help clients effectively respond to SRQ questions. We also provide ERM assistance to companies as they try to anticipate Best's evolving expectations.
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