On November 15, 2023, revised insurance risk-based capital adequacy criteria were released, assigning a UCO identifier to ratings that could potentially be affected by the change. This designation was used to highlight the possibility of a rating action on specific issuer and issue ratings. A UCO identifier was assigned to one or more ratings on 63 issuers, their subsidiaries, or related issues.
The results since then have been consistent with expectations. It was estimated that the criteria implementation could lead to rating actions on about 10% of insurers, with more upgrades than downgrades and the maximum impact on ratings being one notch.
Under the revised criteria, many insurers saw an increase in the calculation of their total adjusted capital. Several changes contributed to this increase, including the removal of haircuts to liability adjustments such as equity-like reserves and value in force. In addition, non-life deferred acquisition costs are no longer deducted. Capital adequacy also improved due to a more explicit recognition of risk diversification benefits, although this was moderated by recalibration of risk charges to higher confidence intervals.
Insurance companies are increasingly adopting revised accounting standards--for example, International Financial Reporting Standard (IFRS) 17--that enhance transparency and visibility of future profits. The revised methodology incorporates this improved transparency into assessment of capital adequacy and financial strength and has contributed to a more favorable assessment of balance sheet strength for several issuers.
For mortgage insurers, capital adequacy primarily improved because mortgage insurance premium and reserve risk charges were recalibrated when capital model criteria were revised. The revised methodology had little impact on total adjusted capital in this segment. The effect of changes to loss reserve discounting and treatment of deferred acquisition costs was marginal for most mortgage insurers.
Of the five negative rating actions taken during implementation of the revised methodology, three occurred due to changes in the definition of capital in debt-funded capital formula. For some U.S.-based health insurers that had included material goodwill and other intangibles on their balance sheets, this change reduced the basis used to determine tolerance limits for debt-funded capital.
Since November 15, 2023, 40 positive rating actions have been taken on the ratings designated as UCO, including one that was not linked to the implementation of the insurance capital model. Additionally, five negative rating actions were taken. The ratings designated as UCO on the remaining 18 issuers were affirmed with no outlook revisions following review.
As of April 17, 2024, about 60% of rated issuers had been reviewed under the revised criteria. In many cases, capital adequacy buffers have changed or rating component scores have been revised to indicate a positive or negative change in capital adequacy. These changes did not prompt rating actions on ratings not designated as UCO because either the change to capital adequacy was not material or because capital adequacy is not currently a key driver of a potential rating action for that issuer.