MetLife Invest… - Wed, 06/21/2023 - 15:53

Insurance Insights | Gauging S&P’s Proposed Changes to Its Risk-Based Capital Adequacy Methodology

Guy Haselmann, Head of Thought Leadership at MetLife Investment Management (MIM), recently sat down with Jingsu Pu, Global Head of Insurance Strategy and Solutions at MIM, to dig through the proposed changes S&P Global is considering to its Insurer Risk-Based Capital Adequacy Methodology. Jingsu will help assess what it could mean for insurers and their ratings.

Guy: It is my understanding that S&P Global Ratings withdrew its December 2021 proposal to change its capital adequacy methodology but then reissued another proposal on May 9, 2023. Why?

Jingsu: This is, in fact, common. The initial proposal by S&P Global Ratings was a ‘request for comment.’1 After receiving feedback from market participants, helpful and improved updates to the previous proposal were made, and the new proposal has been issued once again with a request for new comments.

Guy: Why is there a proposal to make changes in the first place?

Jingsu: Let’s first remember the goal, which is to measure and analyze the capital adequacy of insurance and reinsurance companies worldwide in order to apply the most accurate rating possible. It makes sense for S&P to continually look for ways to improve its methodologies. S&P believes these proposals will enhance global consistency and transparency as well as improve its ability to differentiate risk and usability by consolidating criteria and reducing certain areas of complexity.2 Methodology upgrades also stem from regulatory developments, data gathering enhancements and an expanded ability to draw relevant criteria from various other internal and external frameworks.

Guy: You mentioned global consistency is one reason for the proposed change. How is that possible, given numerous variations in global accounting standards, regulatory regimes and complex legal structures, which all must have an impact on insurance company capitalization?

Jingsu: It’s a good point. It is very difficult to achieve a high level of consistency at the global level. S&P made a solid effort. Its methodologies take many factors into account, and the proposed changes should do an even better job. S&P expresses its capital and earnings opinion by comparing total adjusted capital with riskbased capital requirements at different confidence levels ranging from 99.5% to 99.95%. To account for regional differences, S&P introduces a few regionspecific risk categories with different level of risk charges.3 The idea is that through a combination of a broadly consistent global framework, along with a few important and realistic differentiating factors among regions, the revised S&P capital adequacy methodology can enhance overall global consistency and rating comparability.

Guy: The changes all seem to be about the recalibration of insurer risks, so what is the rationale for choosing different confidence levels?

Jingsu: S&P has revised its confidence levels to four different confidence levels of 99.5%, 99.8%, 99.95% and 99.99%.4 For example, a 99.5% confidence level aligns with the potential volatility and risk exposure in a 1-in-200-year event over a one-year horizon. The three higher confidence levels are achieved by applying factors of 1.2x, 1.4x and 1.65x relative to the results of 99.5% risk charges, based on accepted actuarial and statistical techniques. These numerical confidence levels approximately replace the four different letter rating levels of BBB, A, AA and AAA in the past. S&P said that selecting the confidence levels was to ensure that the outcomes preserve rank ordering and risk differentiation consistent with its insurance rating framework.

Guy: S&P is proposing changes to its Total Adjusted Capital (TAC) calculations. What are the likely changes and impact?

Jingsu: The goal of the proposed TAC calculation changes is clarification, simplification and alignment. TAC calculation starts with shareholders’ equity for public insurers and surplus for mutual ones, and then makes various adjustments and judgment calls along the way to derive the final TAC. One of the new methodologies would include changes to tolerances for debt-funded capital. The May 2023 revised proposal provides a much more detailed definition for what qualifies as “debt-funded capital.” It breaks out the criteria for both the holding company and the non-operating holding company, which may fall outside of the regulatory perimeter. It can get complicated, but the new definition considers whether the capital from the debt instrument is available and able to absorb losses through coupon deferral or cancellation, or through principal deferral, write-down or conversion, without causing an event of default. The bottom line is that S&P is looking to see if the proceeds from the debt instrument are available to the regulated operating entities to absorb losses on a going-concern basis. Hybrid capital securities are addressed separately and individually, and are typically subjected to higher tolerance thresholds.

Guy: I would think that depending on whether statutory financials or GAAP financials are used, S&P could get different results. How do they rectify this issue?

Jingsu: For some U.S.-based insurers, particularly life insurers, both are produced. Regardless, S&P takes these factors into account to decide which are better suited for its capital analysis. Statutory reports typically do not include the holding companies that issued the debt and hybrid securities, so S&P may calculate adjusted common equity (ACE) using GAAP financials solely for the purpose of determining the debt-funded capital and hybrid tolerances, and then incorporate these tolerances into the statutory-based capital analysis.5 Since U.S. holding companies are outside the regulatory boundary, the proceeds of debt-funded capital retained at the holding company is subject to a 20% haircut in determining TAC resources, while proceeds used to fund nonregulated activities would not be eligible for inclusion in TAC.

Guy: What else can you think of that stands out as a change from the earlier proposal?

Jingsu: We’ve discussed TAC, the numerator for capital ratio calculation. The denominator is an insurer’s RiskBased Capital (RC) that is often more insurance and insurer-specific, and computationally heavy. There are three high-level points about RC I want to add. 1: S&P’s RC framework is highly consistent with other principal-based regulatory capital regimes globally, such as Solvency II in Europe and revised Risk-Based Capital (RBC) across Asia. 2: Individual risk exposure is calibrated and calculated differently, and an insurer may see an increase in many of its individual capital risk charges. 3: Multiple levels and recalibrated diversification may keep the overall capital requirement in check, thanks to more explicit correlation benefits.

Guy: Let’s bring this full circle and remember that the goal for S&P is to determine the most accurate rating possible given a wide variety of factors. Therefore, how will these new methodologies impact current ratings?

Jingsu: I find it useful to think of the impact like a waterfall. First level of impact is on capital and earnings in an insurer’s financial risk profile. Approximately 30% of that calculation can be affected. Second level is an insurer’s standalone credit profile, where financial risk is one key anchor, together with business risk as the other anchor. S&P estimates 20% of the standalone credit profile will have an impact. Third level is an issuer’s rating, where 10% may see a change, more up than down. S&P stated that the majority of rating actions would be one notch, with more upgrades than downgrades.6 The upgrades would mostly be based on adequately capturing the diversification benefits explicitly, and they would include standalone improvements to TAC resulting from the removal of various haircuts to liability adjustments and non-deduction of non-life deferred acquisition costs. For others, however, changes to debt-funded capital limits and eligibility factors, and recalibration of risk charges to higher confidence levels, could lead to declines in capital adequacy.

Guy: Does S&P take the ratings of other rating companies into account?

Jingsu: Initially S&P proposed significantly penalizing insurers holding instruments not rated by S&P. S&P proposed lowering the ratings by Moody’s and Fitch by one to three notches, but following extensive feedback, S&P revised its stance. The May 2023 proposal still prioritizes use of S&P ratings where available. In the absence of an S&P rating, S&P will rely on a Credit Rating Agencies (CRA) mapping table, whereby it uses the lowest available rating where multiple ratings are available.7

Guy: When do you expect these changes to take place?

Jingsu: The latest request-for-comments deadline is June 30th. I suspect S&P will quickly assess the feedback and issue a final announcement of changes shortly thereafter. I do not expect any dramatic changes from those now proposed in the May 2023 request for comments.

Guy: It seems it can get very complicated, with many aspects to take into account. Yet, S&P appears be on top of it — having considered and implemented earlier feedback in the new proposals that will ultimately result in changes that improve S&P’s methodologies and ratings.

Jingsu: I agree. Absolutely.

Read More From MetLife Here

1 ARCHIVE | Criteria | Insurance | Request for Comment: Request For Comment: Insurer Risk-Based Capital Adequacy--Methodology And Assumptions | S&P Global Ratings (
6 S&P Global Ratings Withdraws Rating Input Approach From Proposed Insurer Risk-Based Capital Adequacy Criteria | S&P Global Ratings (

This material is intended solely for Institutional Investors, Qualified Investors and Professional Investors. This analysis is not intended for distribution with Retail Investors. This document has been prepared by MetLife Investment Management (“MIM”)1 solely for informational purposes and does not constitute a recommendation regarding any investments or the provision of any investment advice, or constitute or form part of any advertisement of, offer for sale or subscription of, solicitation or invitation of any offer or recommendation to purchase or subscribe for any securities or investment advisory services. The views expressed herein are solely those of MIM and do not necessarily reflect, nor are they necessarily consistent with, the views held by, or the forecasts utilized by, the entities within the MetLife enterprise that provide insurance products, annuities and employee benefit programs. The information and opinions presented or contained in this document are provided as of the date it was written. It should be understood that subsequent developments may materially affect the information contained in this document, which none of MIM, its affiliates, advisors or representatives are under an obligation to update, revise or affirm. It is not MIM’s intention to provide, and you may not rely on this document as providing, a recommendation with respect to any particular investment strategy or investment. Affiliates of MIM may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned herein. This document may contain forward-looking statements, as well as predictions, projections and forecasts of the economy or economic trends of the markets, which are not necessarily indicative of the future. Any or all forward-looking statements, as well as those included in any other material discussed at the presentation, may turn out to be wrong. All investments involve risks including the potential for loss of principle and past performance does not guarantee similar future results. In the U.S. this document is communicated by MetLife Investment Management, LLC (MIM, LLC), a U.S. Securities Exchange Commission registered investment adviser. MIM, LLC is a subsidiary of MetLife, Inc. and part of MetLife Investment Management. Registration with the SEC does not imply a certain level of skill or that the SEC has endorsed the investment advisor. This document is being distributed by MetLife Investment Management Limited (“MIML”), authorised and regulated by the UK Financial Conduct Authority (FCA reference number 623761), registered address 1 Angel Lane, 8th Floor, London, EC4R 3AB, United Kingdom. This document is approved by MIML as a financial promotion for distribution in the UK. This document is only intended for, and may only be distributed to, investors in the UK and EEA who qualify as a “professional client” as defined under the Markets in Financial Instruments Directive (2014/65/EU), as implemented in the relevant EEA jurisdiction, and the retained EU law version of the same in the UK. MIMEL: For investors in the EEA, this document is being distributed by MetLife Investment Management Europe Limited (“MIMEL”), authorised and regulated by the Central Bank of Ireland (registered number: C451684), registered address 20 on Hatch, Lower Hatch Street, Dublin 2, Ireland. This document is approved by MIMEL as marketing communications for the purposes of the EU Directive 2014/65/EU on markets in financial instruments (“MiFID II”). Where MIMEL does not have an applicable cross-border licence, this document is only intended for, and may only be distributed on request to, investors in the EEA who qualify as a “professional client” as defined under MiFID II, as implemented in the relevant EEA jurisdiction. For investors in the Middle East: This document is directed at and intended for institutional investors (as such term is defined in the various jurisdictions) only. The recipient of this document acknowledges that (1) no regulator or governmental authority in the Gulf Cooperation Council (“GCC”) or the Middle East has reviewed or approved this document or the substance contained within it, (2) this document is not for general circulation in the GCC or the Middle East and is provided on a confidential basis to the addressee only, (3) MetLife Investment Management is not licensed or regulated by any regulatory or governmental authority in the Middle East or the GCC, and (4) this document does not constitute or form part of any investment advice or solicitation of investment products in the GCC or Middle East or in any jurisdiction in which the provision of investment advice or any solicitation would be unlawful under the securities laws of such jurisdiction (and this document is therefore not construed as such) For investors in Japan: This document is being distributed by MetLife Asset Management Corp. (Japan) (“MAM”), 1-3 Kioicho, Chiyoda-ku, Tokyo 102- 0094, Tokyo Garden Terrace KioiCho Kioi Tower 25F, a registered Financial Instruments Business Operator (“FIBO”) under the registration entry Director General of the Kanto Local Finance Bureau (FIBO) No. 2414. For Investors in Hong Kong S.A.R.: This document is being issued by MetLife Investments Asia Limited (“MIAL”), a part of MIM, and it has not been reviewed by the Securities and Futures Commission of Hong Kong (“SFC”). MIAL is licensed by the Securities and Futures Commission for Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities. For investors in Australia: This information is distributed by MIM LLC and is intended for “wholesale clients” as defined in section 761G of the Corporations Act 2001 (Cth) (the Act). MIM LLC exempt from the requirement to hold an Australian financial services license under the Act in respect of the financial services it provides to Australian clients. MIM LLC is regulated by the SEC under US law, which is different from Australian law. MIMEL: For investors in the EEA, this document is being distributed by MetLife Investment Management Europe Limited (“MIMEL”), authorised and regulated by the Central Bank of Ireland (registered number: C451684), registered address 20 on Hatch, Lower Hatch Street, Dublin 2, Ireland. This document is approved by MIMEL as marketing communications for the purposes of the EU Directive 2014/65/EU on markets in financial instruments (“MiFID II”). Where MIMEL does not have an applicable cross-border licence, this document is only intended for, and may only be distributed on request to, investors in the EEA who qualify as a “professional client” as defined under MiFID II, as implemented in the relevant EEA jurisdiction. The investment strategies described herein are directly managed by delegate investment manager affiliates of MIMEL. Unless otherwise stated, none of the authors of this article, interviewees or referenced individuals are directly contracted with MIMEL or are regulated in Ireland. Unless otherwise stated, any industry awards referenced herein relate to the awards of affiliates of MIMEL and not to awards of MIMEL.
1 MetLife Investment Management (“MIM”) is MetLife, Inc.’s institutional management business and the marketing name for subsidiaries of MetLife that provide investment management services to MetLife’s general account, separate accounts and/or unaffiliated/third party investors, including: Metropolitan Life Insurance Company, MetLife Investment Management, LLC, MetLife Investment Management Limited, MetLife Investments Limited, MetLife Investments Asia Limited, MetLife Latin America Asesorias e Inversiones Limitada, MetLife Asset Management Corp. (Japan), and MIM I LLC and MetLife Investment Management Europe Limited.


Sign Up Now for Full Access to Articles and Podcasts!

Unlock full access to our vast content library by registering as an institutional investor .

Create an account

Already have an account ? Sign in