LONDON--(BUSINESS WIRE)--There are similarities in capital requirements for European (re)insurers under AM Best’s proprietary capital model – Best’s Capital Adequacy Ratio (BCAR) – and Solvency II’s quantitative risk-based assessment of capitalisation, the Solvency Capital Requirement (SCR) ratio, according to analysis by AM Best. In a new Best’s Special Report, titled “AM Best Compares BCAR Model Output With Solvency II Capital Requirements,” when comparing the output from the two models, AM Best notes that there is a level of positive correlation, with those companies attaining higher BCAR scores generally also having better Solvency II SCR coverage.
The report notes it is relatively early days in the application of Solvency II and AM Best’s updated BCAR model, with only two years of data available. Therefore, there has been only limited opportunity to observe trends. However, AM Best notes that by either metric virtually all AM Best-rated companies in the EU have excellent capital adequacy.
Timothy Prince, director, analytics, said: “Although the implementation of Solvency II has revealed a generally well-capitalised European insurance segment, there is no doubt that, over time, the stability of the regime will be tested as the segment encounters market volatility and large capital events. AM Best will closely monitor this evolution.”
The report adds that risks contributing toward required capital in BCAR and Solvency II are broadly the same. However, calculations for required and available capital are different. At a basic level, both frameworks cover the core risks borne by (re)insurers: market, underwriting and credit risk. However, certain risks included in Solvency II, such as operational and currency risk, are not included in BCAR, but are included elsewhere in AM Best’s analysis.
Catherine Thomas, senior director, analytics, said: “BCAR remains fundamental to AM Best’s analysis of all companies, including those in the EU. Crucially, it captures AM Best’s view of risk and allows for a consistent measurement on a global basis. However, where a well-understood internal model is used by an EU company, it may provide insight into the economic realities that the company faces and act to influence AM Best’s understanding of its risk-adjusted capitalisation.”
To access the full copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=288335.
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