News focus - Capital adequacy - Fitch Ratings announces new capital-model methodology.

(From Reinsurance)

Fitch Ratings has released an enhanced methodology for incorporating a review of an insurer's in-house capital model into its ratings. According to the agency, such models can often promote a superior understanding of risks in addition to their quantitative estimation. Such techniques can, if used correctly, improve risk mitigation, allocation of resources, pricing and product design.

"The assessment of companies' own capital models represents an important part of Fitch's overall view of an insurer's capital adequacy within the agency's ratings analysis," said Keith Buckley, group managing director and global head of insurance at Fitch. "Insurers' in-house models can provide important insights into management intent as well as often being relatively sophisticated and highly company-specific, especially for large multinationals."

As published separately in its new exposure draft on capital adequacy, Fitch considers the companies' own capital models, the ratings agency's own new capital model, Prism, and the impact of regulatory capital requirements. The weighting given to these elements is dynamic and varies according to various factors, including the excess of capital above the regulatory minimum and the degree of comfort that Fitch has with an insurer's own capital model.

"While there are clear advantages of utilising an individual company's capital model in our analysis, there is currently a lack of consistency between models and some degree of moral hazard for the models where they are not transparent to the outside world. This is especially important because of the increasingly ...