OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best is requesting additional industry feedback on the planned revisions to its core rating methodology, Best’s Credit Rating Methodology (BCRM), as well as its criteria procedure for the U.S. property/casualty Best’s Capital Adequacy Ratio (BCAR). Comment is being specifically sought on the modeling of tail risk and the weighting this receives within the balance sheet strength assessment portion of BCRM.
A.M. Best believes that modeling tail risk is a valuable tool for individual companies to assess exposure to extreme events. However, the limited amount of historical data utilized to model most tail risk could work to the detriment of global consistency and the need to benchmark balance sheet strength across peer companies, according to a new Best’s Briefing, “Update to Best’s Credit Rating Methodology and BCAR Call for Comment.”
“There are many assumptions that go into modeling extreme catastrophe, underwriting or market risk events,” said James Gillard, group vice president of credit rating criteria, research and analytics, A.M. Best. “These assumptions in themselves raise concerns around false precision, drive greater volatility in the model output and can result in the inability to truly know what confidence interval is being modeled.”
The briefing notes that the risk of losing the ability to apply consistent analytical metrics when evaluating balance sheet strength is only heightened in the global context, where in many developing markets the data and modeling tools needed to assess exposure to tail events is simply nonexistent.
For these reasons, A.M. Best is assessing the merits of hard coding the impacts of extreme confidence intervals, such as the 99.8 and 99.9 Value at Risk (VaR) levels, into the balance sheet strength assessment. Rather, these intervals and other relevant data points might be more appropriate in another part of the BCRM; for example, as a component of enterprise risk management, and the linkage between these extreme events and a company’s risk tolerance and risk appetite statements.
A.M. Best announced the proposed revisions to its BCRM and BCAR on March 10, 2016, and has held several webinars and public seminars since then, in addition to soliciting market feedback. An archive of past webinars can be found at http://www.ambest.com under the Conferences & Events tab.
Additional feedback is being specifically sought regarding these questions:
- Do you fully understand the Building Block approach outlined in the BCRM and is it sufficiently transparent? Please explain if your response is “No”.
- Are there any parameters outlined for Balance Sheet Strength, Operating Performance, Business Profile, Enterprise Risk Management or Comprehensive Adjustment in BCRM that you disagree with? If so, please explain which parts you disagree with and provide alternative suggestions.
- What are your views on using VaR metrics for risk modeling in general? Do your views concerning the value of these metrics change as one goes out into the tail (e.g., VaR 99.8 and 99.9)?
Written comments should be submitted by email to methodology.commentary@ambest.com no later than June 30, 2016. To access a copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=248915 .
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