CREFC Alert: S&P Drops Proposed Notching and Mapping Elements of Insurer Risk-Based Capital Methodology
May 9, 2022
Earlier today, S&P Global Ratings announced that it is withdrawing certain criteria of its proposed risk-based capital adequacy methodology for insurers and reinsurers. The withdrawn criteria refer to the notching and mapping elements of the proposal, which would have automatically lowered the ratings of specific insurance company investment holdings rated solely by S&P’s competitors. According to the Securities and Exchange Commission (SEC), S&P is the top participant in the U.S. market for credit ratings, controlling about 50% of the credit ratings market as of December 2020.
The company’s withdrawal follows a request for comment (RFC) period that ended on April 29, in which a broad-based spectrum of industry participants submitted comments. S&P stated it received a “high volume of comments” and that it is taking this action due to “the nature of some of the concerns raised.” The company also noted that it is “considering alternatives for the withdrawn elements of the proposed criteria to assess the potential credit risk associated with these types of exposures.”
Concerns with S&P’s proposal also gained traction in Washington, DC. The Antitrust Division of the Department of Justice submitted comments in which it raised concerns about the changes, saying the company’s proposal could potentially “suppress competition from rival rating agencies.” In addition, a group of 26 House lawmakers urged the Securities and Exchange Commission (SEC) to investigate the proposal. This followed letters sent to Congress by the National Association of Insurance Commissioners (NAIC) – the industry’s standards and regulatory support group.
S&P noted that it will be issuing a subsequent RFC and expects to finalize its criteria “no sooner than the fourth quarter of this year” and that, until such time, the current criteria will remain in effect. CREFC’s comment letter to S&P in response to the RFC can be found here, and for any questions, please contact Lisa Pendergast.