Financial strength rating is the Agency's opinion on the ability of a rated entity to fulfill its financial obligations to clients, counterparties, and creditors. Financial strength ratings are assigned to the companies that rarely use loans and credits (liabilities of credit nature) in the course of their regular activities, and this is the difference from credit ratings.
Insurance companies (IC) are companies licensed in accordance with Russian and international laws, which provide insurance and reinsurance services and do not specialize in life insurance.
Rating score is multifactorial. When assessing financial strength of insurance companies, NRA uses information on the dynamics of a company's development, quality of the implementation of its strategy, corporate governance and risk management, the level of development of the market position, and business diversification. Also assessed such aspects as information transparency, reputational and regulatory risks.
The assessment methodology is based on the scoring system.
The model includes the following sets of indicators:
|Set||Title||Weight of set|
|Set 1||Financial Analysis||9|
|Set 2||Management Review||9|
|Set 3||Comparative Assessment||6|
|Fines||Completeness of Information Disclosure||1|
|Fines||Realization of Events Affecting the Level of Reputational Risk||1|
Financial analysis set includes assessment of the following indicators:
- Authorized capital
- Insurance reserves
- Liquidity indicators
- Loss ratio of insurance activities (payout ratio)
- Quality and proportion of accounts receivable
- Loans and credits
- Reinsurance protection
- Dynamics of insurance gross premiums
For more accurate assessment of the reinsurance protection, NRA applies an expert score, which involves an assessment of the following indicators, if this assessment was not adequately reflected in the calculation of ratios within the set:
- Structure of the company's business (large and small risks)
- Level of concentration in the large risks insurance
- The possibility of application of financial optimization schemes in the company's reinsurance transactions
- Rules and limits that determine the size of retention
- Causes of risk transfer to reinsurance
- Rules and limits that determine the size of risk retention
- The company's policy in underwriting
- Presence of obligatory reinsurance
Management review set includes assessment of the following indicators:
- The influence of the owners on the company's development
- Customer base
- Risk analysis and investment diversification
- Regional branch network
- The company's development strategy
- Products diversification of the insurance portfolio
- Evaluation of effectiveness of the management team
- Evaluation of the quality of insurance risks management
- Quality of actuarial valuation
- Quality of an auditor
For more accurate assessment of the risks in the investment portfolio, NRA applies an expert score for indicators of risks and investment diversification, which takes into account the following factors:
- The level of credit risks in debt assets and funds portfolio
- The level of market risks in the share portfolio
- Concentration of the portfolio on issuers and groups of companies
- Ratings of financial instruments in which to invest
- Duration of the portfolio and its liquidity
- The level of immobilization and the amount of non-core, non-tradable or illiquid assets
- Evaluation of the quality of risk management in the management of investing own funds and insurance reserves
- Compliance with the legislative restrictions on the structure of an investment portfolio
- Quality of depositories/specialized depositories, brokers and banks
- The proportion of investments in assets of related parties
- The amount of market risks in the investment portfolio in relation to the size of assets and insurance reserves
For specialized reinsurers NRA uses a special way of regional branch network evaluation. Since such companies can have a successful centralized business, or a network of companies in the same insurance group but with a different specialization, NRA applies an expert assessment of regional branch network development, based on evaluation of business scale and amount of risks taken in reinsurance.
Comparative assessment set includes assessment of the following indicators:
For companies engaged in non-life insurance:
- Dynamics of the amount of premiums on voluntary non-life insurance
- Dynamics of the amount of premiums on compulsory insurance
- Dynamics of the amount of premiums on inward reinsurance
- Loss ratio on voluntary non-life insurance
- Loss ratio on compulsory non-life insurance
- Loss ratio on inward reinsurance
For specialized reinsurers:
- Dynamics of the amount of premiums on inward reinsurance
- Loss ratio on inward reinsurance
In order to conduct the most adequate reliability analysis of insurance companies, considering the specifics of reporting on each group, they are divided into two groups: 'companies engaged in non-life insurance' and 'companies that only engaged in inward reinsurance' ('specialized reinsurers'). A specific set of comparative indicators is defined for each group.
Comparative assessment set determines the overall adequacy of an insurance company's performance in relation to the average market conditions, as well as, indirectly, forms an expert opinion on the effectiveness of the management team given the current economic situation. The set is based on a comparison of average industry indicators and relevant indicators of a particular insurer. To solve this problem NRA analyzed statistics on insurance companies from 2012 to 2014, which is available on the website of the Central Bank of Russia.
Completeness of information disclosure
NRA assesses the completeness of provided information in comparison with the list of the necessary information requested by the Agency for the rating procedure. Also estimated how detailed are the questionnaire answers, the quality of information about the strategy and plans of the insurance company, and the quality of information received within the rating interview.
Realization of events affecting the level of reputational risk
The factors that may lead to realization of reputational risk are:
- failure to comply with the laws of the Russian Federation, company's articles of association and by-laws, ordinary course of business, principles of professional ethics;
- significant misreporting of the fair value of assets, company's liabilities (including off-balance sheet) and capital, as well as revenues and profit;
- withholding of information that should be disclosed in accordance with Russian legislation, or under contract with the Agency;
- the company's participation in conducting of illegal operations, legalization (money laundering) of proceeds of crime, terrorism financing, as well as other illegal activities carried out by dishonest customers, counterparties (contractors, partners), and (or) employees;
- deliberate underestimation of investment risks, implementation of excessively risky investment and market policy, as well as other actions leading to possible damage to customers, counterparties, and, consequently, the company's business reputation;
- presence (appearance) of a conflict of interest, about which the company did not inform its customers, counterparties, or other interested parties, in the authorized manner;
- public or judicial conflicts and disputes on corporate governance;
- claims from the state authorities, judicial proceedings, with the imposition (potential imposition) of fines in the amounts significant for the business (in relation to the company and/or its owners);
- negative publicity in the media about the company, its employees, owners, top managers, and affiliates, the accuracy of which is considered to be adequate by the Agency.
In exceptional cases, the Rating Committee may decide to assign/change the rating at a level different from the rating indicated in the rating model. This is possible if there are:
1) Favorable or adverse changes in the external environment (political, macroeconomic, market risks, competitive environment, legal risks), including:
- for accounting of cyclic recurrence in the industry (when the phase of economic cycle in the industry is not adequately taken into account in the rating model) – deviation is allowed at high phase – downward, at low stage – up of the value of the rating model;
- in the case of sudden changes in monetary / currency / financial market variables (exchange rates, interest rates, prices for goods and raw materials);
- in the case of influence of regional political risks / authorities on the company's activities.
2) The apparent deviation (lead or lag) of the company compared with its competitors; not fully accounted difference in comparative indicators of the company and its competitors, accounting of the benefits of a monopoly position, restrictions on competition or risks associated with barriers to entry.
3) Improper quality, unconfirmed by documents or inadequate valuation of assets and investments in the preparation of financial statements, which complicates the analysis of financial results and requires additional expert assessment.
4) A significant change in the indicators used in the rating model, which occurred after the reporting date and were not (can not or should not be at the moment) taken into account in the current model, but will have an undoubted impact on it later.
5) 100% ownership, tight business integration, low autonomy and independence of subsidiaries from the parent company, low diversification of assets of the holding/parent company, if the risks of a third company fully determine risks of the analyzed company.