Rating Risk

Fitch Ratings (New York and London) unveiled Prism, a global economic insurance capital model that will be added to its evaluations of carriers' enterprise risk management. By rating insurers' capital models with Prism, Fitch can improve risk mitigation, allocation of resources, pricing and product design across the industry, according to Keith Buckley, Fitch's global head of insurance. Prism, which will be released in early 2007, was designed to better compare U.S. and international insurers' capital models. "There is currently a lack of consistency between company models and some degree of moral hazard for the models where they are not transparent to the outside world," says Buckley. "This is especially important because of the increasingly central roles that capital models are playing through capital allocation and their influence on regulatory requirements."

To establish consistency, Fitch developed a framework to assess models in life and annuity, nonlife and health. It uses regional data and modern financial theory to compare insurers' asset liability management risk, underwriting risk and natural catastrophe risk, among other risks. Prism will rate models based on their sensitivities, robustness and ability to handle multiple stresses by running thousands of computer simulations of possible events.