Fitch Starts Prism 2.0 for U.S. Non-life Insurers [Manufacturing Close – Up]

Following an internal validation review and external user beta testing process, Fitch Ratings is implementing its enhanced stochastic capital model, Prism 2.0, for U.S. non-life insurers.

In a release on January 18, Fitch noted that Prism results will be highlighted in rating action commentaries and reports.

No near-term rating actions are expected or planned with this model update. Fitch reviews several measurement tools to assess insurer's capital adequacy levels, including traditional leverage ratios and reviews of regulatory capital ratios, and Prism 2.0 will now be included in that toolkit. Using multiple viewpoints avoids an over-reliance on any particular model or analytical approach.

Fitch has released, via its website, a special report 'Prism Model Definition Document' that provides interested parties with a thorough description of the model. In addition, for those U.S. non- life insurance groups rated by Fitch, the model can be downloaded from a secured internet site and run using company-provided data. Both of these pieces were made available for comment to Fitch's rated universe prior to implementation.

The enhancements to Prism follow an in-depth review and validation of its capital model that began in 2009. The primary objective was to gather and implement any lessons learned from the financial crisis as it applied to its original model ('Prism 1.0'). Fitch found no material or inherent weaknesses in the prior model construction, application or operation.

Nonetheless, Fitch decided to make several modifications to its modeling assumptions to incorporate certain minimum capital thresholds, such as use of minimum loss ratios when simulating underwriting results, and a general strengthening of correlation assumptions. These had the effect of increasing 'Target Capital' for a number of issuers at the highest ratings thresholds by creating more severe stress assumptions 'in the tail' of the loss distribution.

In addition, Fitch expanded its definition of 'Available Capital' to recognize that certain balance sheet items can fluctuate, such as net unrealized gain/loss position on the bond portfolio and the value of affiliated investments.

Prism 2.0 uses advanced and accepted financial and actuarial techniques in developing a view of insurance capital adequacy. Another feature is the inclusion of a third-party natural catastrophe model. The model uses published statutory data as its primary source of information but contains analytical flexibility to adjust for supplementary data in certain cases, and allows analysts to create alternative scenarios by varying certain key assumptions.

Additional information is available at 'fitchratings.com'.

Applicable Criteria & Related Research:

--'Insurance Rating Methodology' (September 19);

--'Managing and Developing Criteria and Models' (April 4).

Applicable Criteria and Related Research: Prism U.S. Non-Life Insurance Capital Model -- Model Definition and Calibration Document

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=671118

Insurance Rating Methodology Amended

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=698731

Managing and Developing Criteria and Models

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=675617

((Comments on this story may be sent to [email protected]))