Think and analyse, not plug and play


Think and analyse, not plug and play

Joecicak /

Disruption knows no boundaries—even rating agencies are not immune as a better way to assess risk emerges, says Tina Bukow of Kroll Bond Rating Agency.

By now, the financial industry is aware that Kroll Bond Rating Agency (KBRA) has emerged as a force to be reckoned with in the credit rating industry.

KBRA’s integrity, innovation and commitment to restore trust in credit ratings has helped us become a market leader in many of the markets where we provide credit ratings. We first came on the scene analysing structured finance transactions and quickly gained ground in other sectors like banking, public and project finance, financial guaranty, funds, financial institutions, corporates and now re/insurance. One of our target markets within insurance is alternative risk: captives and reinsurers. We believe our rating approach serves all markets well and alternative risk is no exception.

Many will agree that innovation and competition in the insurance rating agency space are needed. KBRA recognised that need, listened to the market constituents, onboarded analytic expertise, began acquiring the necessary certifications (nationally recognised statistical rating organisation [NRSRO] for one) and built an insurance financial strength credit rating platform to provide the industry, investors and policyholders with a rating outcome derived from true and comprehensive analytics, rather than model-driven outcomes. We are also keenly aware of the need for transparency, stellar customer service and substantive rating reports that speak to members of the investment community as well as corporate boards.

Starting with our inaugural insurance methodology in 2016 (Global Insurer and Insurance Holding Company Rating Methodology) we have, as of this writing put out for public comment our captive methodology (Global Captive Insurer Rating Methodology), authored by Carol Pierce, the newest member of our growing insurance team, focusing on rating captives and reinsurers.

KBRA’s Insurance Financial Strength Rating (IFSR) approach is completely transparent and very fundamental—grass roots, if you will—in that we do not believe in proprietary model-driven ratings for insurance companies. In our opinion, this approach provides for a more accurate outcome and it resonates particularly well with members of the captives community.

Clearly, a proprietary model-driven rating approach is less analytically challenging and may not paint as clear a picture of a company as a true financial analysis approach would. Do not misunderstand, models do have their place. KBRA believes that using a combination of a company’s model as well an industry one (for example, RBC), as a part of the quantitative analysis allows for a broader view and more in-depth discussions on the qualitative pieces. For example, how the company arrived at its model and how the components fit with their business plan: a perfect storm of quantitative and qualitative working in sync. A summary of our rating approach, taken from our proposed methodology, follows:

Rating approach

First, the KBRA insurance financial strength rating (IFSR) applies only to insurance operating companies. The IFSR is a measure of the overall financial condition of an insurance operating company with respect to its ability to meet its policyholder obligations.

KBRA may append - or + modifiers to ratings in categories AA through CCC to indicate, respectively, upper and lower risk levels within the broader category.

KBRA follows a sequential incorporation of four key credit factors to arrive at an Insurer Financial Strength Rating (IFSR) for a captive insurance company, as follows:

A quantitatively-based Captive Quantitative Assessment (CQA), expressed in lowercase letters using KBRA’s long-term credit scale. After the application of stress testing the CQA is converted to a preliminary credit assessment (PCA);

A qualitative score for factors that may have financial underpinnings but contain some subjectivity, including quality of capital (i.e., use of letters of credit and loan backs), reserving practices, leverage (i.e., net retained risk), reinsurance, operating fundamentals, regulatory environment and risk management;

An external considerations score indicating either potential credit support from the owner(s) due to the strategic importance of the captive to the owner(s) and the ability and willingness of the owner(s) to financially support the captive when needed or negative impact from a lack of ready source(s) of additional capital should the need arise; and

A potential rating constraint due to currency-transfer risk.

Figure 1 illustrates the sequential steps KBRA follows to derive an IFSR from a captive insurance company’s CQA.

In addition, being a full service credit rating agency allows us to be ‘multilingual’—for captives that means we have the ability to rate and understand the parent. We have a dedicated methodology for rating corporates, negating the need for us to rely on other rating agency assessments.

It also allows us to take into consideration the unique characteristics of each captive and not take a punitive approach for being a startup or not being a profit centre or having a loan back or line of credit. Further, it allows a captive to potentially be rated higher than its parent. KBRA also does not have sovereign caps; in fact, we have our own sovereign rating methodology.

Not having a proprietary model allows us to do what credentialled analysts are trained to do: think and analyse, not plug and play.

In an industry that is not plain vanilla, with companies, investors and parents that are so sophisticated and savvy, I ask, “Is a model-driven rating providing you with the best possible feedback and outcome for your captive and its constituents?” 

I submit to you that disruption vis-à-vis change, while somewhat frightening, spurs innovation and better outcomes for those willing to embrace it with inquisitiveness and positivity. I further submit that competition is good and healthy for all markets: anyone remember Ma Bell?

As of this writing, KBRA has 7,930 ratings issued; $695+ billion rated issuance, 52 methodologies and 410 research papers. All our research and reports are free of charge and can be accessed via our website We have more than 260 employees with three offices in the US and one in Dublin, Ireland.

KBRA is committed to the markets we serve and all users of our ratings. We continue to grow and innovate and we are here to stay.

Tina M. Bukow is senior director, business development, insurance at Kroll Bond Rating Agency. She can be contacted at:

KBRA, Tina Bukow, Ratings, Captives, Disruption, North America

Captive International