Rating agencies have been in no rush to jump into the world of alternative capital in insurance, but that is where KBRA President and CEO Jim Nadler sees an ideal opportunity.
“We have seen company after company come to us just exasperated by having to do backflips to fit into these capital models that stick around for years, and we think these rating agencies have done a disservice to the market,” he says.
This outlook fits KBRA’s previously stated philosophy of looking at each rated entity on an individual basis rather than through a prescriptive, purely capital-based lens.
“We look at your capital model, and we make sure that it is appropriate at the time for your risks and assets and we determine your rating based on that,” Nadler explains. “This makes it so that two years later when your capital model changes because the market has changed, you’re not tearing your hair out trying to figure out how to make your business look like it fits into a static rating structure.
Another factor that will likely have a large impact on the insurance-financial-strength rating space is the threat posed by cyber risks.
According to Nadler, cyber threats have only grown over the past few years, but insurers are finally starting to get a better handle on the peril.
“Cyber is becoming an even bigger issue than we would have predicted. Across the board, it affects our ratings in insurance, financial institutions, corporates, etc. We’re finding that it’s becoming a bigger issue,” he says.
Indeed, cyber “has the potential to be the next cat risk for insurers,” adds Nadler. “At the same time, the information and the data
Despite a continued lack of insight into the cyber insurance market, oversight in the space is improving, he says: “We’re just now beginning to see the early signs of really clear and good corporate governance across the universe of banks and other financial institutions.”
Some of that push is regulatory, he says: “Companies are scared, worried that if they don’t set up a protocol that follows best practices that they will be held liable for anything that goes wrong. The other half is reputation risk. Breach disclosures getting shorter due to this, as companies realize getting on top of things is important. This is helping insurers get their arms around the insurance side of the cyber market.”