Criteria - Life Insurance companies
EWRM Capabilities & Financial Strength Rating
Brickwork considers several criteria to arrive at the rating that include: analysis of the company’s policies, practices, performance of management, projected business plans & financial analysis, industry and business risks analysis, risk management systems, , investment management, use of technology, marketing and distribution channels, parental and recapitalisation support in case of new companies.
Brickwork has a well defined framework for EWRM & Financial Strength Rating as given below: -
BWR rating focuses on critical aspects for the insurance business under Indian Regulatory framework. The insurer’s ability to meet its obligations to the policy holders is assessed on the basis of the following key parameters:
- The extent of Capital Adequacy
- Assessing Enterprise Risk Management capabilities
- Competitive positioning
- Liability side risk – the fundamental risk arising out of underwriting & reserving
- Asset Side risk – potential losses arising out of credit risk, market risk, illiquid securities valuation, etc
- Asset Liability Management
- Leverage Analysis and Financial Flexibility
- Management Strategy
Capital Adequacy:
It would cover following areas:-
- Capital cushion available to support its policyholders obligations and other liabilities
- Balance sheet strength
- Entire group analysis of which the rated insurer is a part (wherever applicable)
- An insurer’s potential need for additional capital in the future, and the sources that may be available to meet this requirement
Enterprise Wide Risk Management:
Brickwork would analyse the insurer’s efforts to align the risk strategy and the business strategy. All ERM practices will be assessed relative to realistic levels of risk at the company, and relative to peers with similar risks. Brickwork evaluates ERM quality in the following areas:
- Risk Management Culture
- Risk Controls
- Extreme Risk Management
- Strategic Risk Management
Competitive Position:
Brickwork analyses the insurer’s source of competitive advantage as well as its overall microeconomic business profile with the aim of evaluating its long-term revenue-generating capability. Key points considered are:
- The company’s competitive strengths and weaknesses
- Quality and spread of distribution channels
- Diversification of business mix – by geography, sector, line of business, distribution source
- Growth rates of premiums (and new business written for life companies) – in total and by line of business - on both net and gross bases, generally over five years
- Market share overall and by major lines of business
- Related non-insurance activities, if any
Asset Liability Management:
Focus Area include:
- Interest rate risk and asset-liability duration gap analysis
- Asset allocation strategies, Asset credit quality and Asset diversification (by asset class, sector, maturity, issuer)
- Portfolio liquidity
Liability Risk Management:
Brickwork analysis the policies of the company with respect to product pricing, actuarial assumptions, actuary report. Special attention is paid to concentration risk, catastrophe risk etc.
Asset Related Risk:
Brickwork reviews the investment policy, portfolio of the insurer. The detail analysis is done to understand the processes followed by the company to manage market risk, credit risk etc.
Management & Corporate Strategy:
The quality and credibility of an insurer’s management team is a key determinant of the company success. Brickwork analyst would meet with senior management to understand future growth strategy & implementation plan.
Operating Performance:
The analysis of operating / underwriting performance focuses on:
- Statutory basis profitability and Return on assets (both pre-tax and post-tax)
- Persistency
- Stability/volatility of earnings
- Return on equity & Return on capital
- Reserving/accounting practices
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