ABIR’s Huff: S&P’s new capital methodology proposal misuse of market power

As the consultation period for S&P Global Ratings’ new insurer risk-based capital adequacy model draws to a close, John Huff, president and CEO of the Association of Bermuda Insurers and Reinsurers (ABIR), has warned the proposals diverge from the requirements of different regulatory regimes.

Speaking to The Insurer TV in the latest Close Quarter episode, ABIR’s CEO said the proposed changes would add a significant burden to Bermudian (re)insurers’ balance sheets, given the restructuring of debt to satisfy the proposals would lead to “less favourable conditions”.

“We’re very concerned about a potentially very disruptive part of the proposal which potentially removes capital credit for senior debt, which we think is counter to traditional finance theory that defines a firm’s capital structure to include debt,” said Huff.

“This is a very abrupt change – it’s almost like a cliff [and] there’s no transition period planned,” he warned.

The proposed changes were published in December last year, and include a material update to S&P’s risk-based capital adequacy methodology – the first proposed change of this kind in over a decade.

John Huff, CEO ABIR

Among other important changes to the framework, the new proposed S&P methodology suggests an increase in total adjusted capital, as well as a reduction in eligibility of senior notes as available capital.

The latter change could force Bermudian (re)insurers to restructure their debt to satisfy S&P’s new requirements. But doing so could be costly due to recent inflationary pressures, explained Huff.

“There are certainly no issues today with the subordination of that [existing] debt at the holding company,” he said.

“I would not want to put a dollar amount on [how much capital could be at risk], but there has certainly been in excess of $1bn recently put into these sorts of instruments that could potentially have to be restructured at less favourable terms,” Huff said.

Aon has said the debt-funded capital change will impact US, Canadian and, in particular, Bermudian insurers.

The interview with Huff followed ABIR’s open letter to S&P, in which the trade body said it “strongly opposes” the proposals. The letter has also been submitted to S&P.

In the 18-page letter, Huff said S&P was “overusing their market power” and that the proposed changes were “anti-competitive”.

This week, the rating agency said it expects to complete the proposed capital adequacy model during the third quarter of this year.*

S&P said in the note that the proposed methodology changes are “intended to improve our ability to differentiate risk, enhance the global consistency of our methodology, improve the transparency and usability of our methodology, and account for more recent data and experience since our last update of the insurance capital model criteria”.

The consultation period ends on 29 April.

Huff noted there has been no indication of a transition period for companies to implement the new requirements, nor has there been reference to a “grandfathering period”.

He added one of the flaws of the new proposal was the disregard for the different regulatory regimes by which companies have to abide.

For Bermudian (re)insurers, some of S&P’s proposals would be “most illogical in terms of the role between the supervisor and the rating agencies”.

“Each [regulatory] regime has its own characteristics. To the extent that any rating agency wants to push one regime over another, it’s important that they work within the established processes to do that.

“For instance, if you’re promoting one regulatory regime over the rest of the world, we think that should be done in an open, transparent way and not through the back door of counting capital just for some global consistency because the regimes are not identical,” he added.

*At the time the interview with Huff was filmed, the timeline for completion of the new model was not yet known.

Click on the video below to view the full 8-minute interview with ABIR’s John Huff:

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Close Quarter: John Huff