Fitch revamps rating standards

High levels of capital adequacy means that no European insurance groups have been affected by Fitch's introduction of two new rating standards, that are intended to distinguish between the impact of default and recovery risk.

Fitch said that both ratings had been embedded within the broader rating systems that had been in place for some time. But by increasing awareness of issuer default risk (IDR) - the risk a company may fail; and recovery risk - how much money can be recovered in the event of failure; it hopes to, "achieve greater transparency in our ratings".

A key feature of Fitch's rating default and recovery ratings is how the regulatory regime may restrict movement of cash from an operating company to a holding company via capital restrictions or formula based dividend restrictions, such as those present in the US.

But according to Keith Buckley, managing director of Fitch's Chicago office, these were not apparent in Europe as: "Regulatory capital standards pose little practical risk of restrictions on cash flow movements, since insurers at our highest rating levels are typically so far above the required amount of capital.

In these cases we believe the IDRs of the operating company and holding company can be aligned, since default risk differences are minimal between them."

The new recovery rating will also not impact on any European insurance operations, with Fitch only assigning it to firms with a credit rating of B++ or lower - a marker that is not applicable to any European insurer.

These new ratings will have an impact on the reinsurance sector, with Buckley noting that in the US and most of Europe - while primary policyholders are afforded priority when an insurer defaults - reinsurance obligations are not. This means that for a given IDR, reinsurer ratings will generally be a notch lower than primary company ratings.