Insurance Company Rating - Credit Rating Agency of Bangladesh

Insurance Company Rating
INTRODUCTION
In light of the prevailing dynamics of the insurance sector in Bangladesh, CRAB has
developed a methodology to rate the strength of insurance companies to meet its future
obligations. The independent and professional approach of CRAB is designed to ensure
reliable, consistent and unbiased opinions. Credit rating of an Insurance company is not
specific to any particular insurance policy or contract because the standing of a particular
obligation would depend on an assessment of its relative standing under the laws
governing the obligation and the insurance company.
RATING METHODOLOGY
The analytical framework for Insurance companies utilizes a format that divides the
analysis into several modules, ensuring that all salient issues are considered. The
parameters for analysis include:
I. INDUSTRY ANALYSIS
A. Competitive Structure
• The degree of concentration within the industry.
• The extent to which the concentration is expected to remain orderly.
• The degree of national protectionism.
B. Regulatory Trends
II. COMPANY ANALYSIS
A. Organizational Structure
• Review of the legal structure with emphasis on holding company and all
subsidiaries and affiliates.
• Relationship within group companies with respect to reinsurance.
• Agreements, formal support agreements, management contracts, tax-sharing
agreements and marketing agreements.
B. Business Profile
• Profitability trend in the company's major business segments and products over 5
years.
• Stability and predictability of cash flows from principal business lines.
C. Investment Portfolio Risks
• Assessment of the investment goals of the company
• Assessment of the constraints within which the investments have to be made.
• Evaluation of the asset quality of the investments and their liquidity characteristics.
• Risk profile of the portfolio.
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D. Financial strength
Evaluation to gauge potential volatility in earnings and to evaluate the protective
factors and adequacy of control procedures to manage volatility. This would include
evaluation of:
• Pricing and underwriting
• Asset / liability management
• Hedging activities
• Foreign exchange exposure
• Reinsurance exposure
E. Assessment of the financial policies of the company
F. Management Quality
G. Systems and procedures
RATING PROCESS
The rating exercise begins with the company issuing a mandate to CRAB, along with the
basic business and financial information. A team of analysts takes up the work of collection
of data and information from the books and records of the concern and interacts with its
executives. The team also relies on the in-house research and database of CRAB and other
data sources considered reliable by the analysts. Factors that may have an impact on the
claims paying ability of the company are discussed with the management. The rating team
makes a presentation to the Rating Committee, covering the whole gamut of issues which
could be critical in determining the claims paying ability. The rating assigned is
communicated to the company along with the rationale.
The company has the option to accept or not to accept the rating or request a rating
review. CRAB would review the rating if supported by new facts arising from changes in
the business environment or operating fundamentals. All information obtained from the
insurance company is kept confidential.
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INSURANCE COMPANIES IPO RATING
RATING
AAA
(Triple A)
AA1
AA2
AA3*
(Double A)
A1
A2
A3
(Single A)
BBB1
BBB2
BBB3
(Triple B)
BB1
BB2
BB3
(Double B)
B1
B2
B3
(Single B)
DEFINITION
Highest Earning Prospect.
Insurance Companies rated in this category are adjudged to be the strongest, characterized by
excellent financials, highest claims paying capability, healthy and sustainable franchises, and a
first rate operating environment. The level, growth and quality of earnings over the medium term
are of the highest grade and changes in business/economic circumstances, as may be envisaged,
are unlikely to significantly impair the underlying fundamentals.
Very High Earning Prospect.
Insurance Companies rated in this category are adjudged to be very strong, characterized by
very good financials, very high claims paying ability, healthy and sustainable franchises, and a
first rate operating environment. The level, growth and quality of earnings over the medium term
are of very high grade and changes in business/economic circumstances, as may be envisaged,
may very slightly impair the underlying fundamentals.
High Earning Prospect.
Insurance Companies rated in this category are adjudged to be strong, characterized by good
financials, high claims paying ability, healthy and sustainable franchises, and a first rate
operating environment. The level, growth and quality of earnings over the medium term are of
high grade and changes in business/economic circumstances, as may be envisaged, may slightly
impair the underlying fundamentals.
Above Average Earning Prospect.
Insurance Companies rated in this category are adjudged to be very solid, characterized by
above average financials, adequate claims paying ability, valuable and defensible business
franchises, and an attractive and stable operating environment. The level, growth and quality of
earnings over the medium term are of above average grade and changes in business/economic
circumstances, as may be envisaged, may impair the underlying fundamentals.
Average Earning Prospect.
Insurance Companies rated in this category are adjudged to be solid, characterized by average
financials, moderate claims paying ability, valuable and defensible business franchises, and a
stable operating environment. The level, growth and quality of earnings over the medium term
are of average grade and changes in business/economic circumstances, as may be envisaged,
may significantly impair the underlying fundamentals.
Below Average Earning Prospect.
Insurance Companies rated in this category are adjudged to be almost solid, characterized by
nearly average financials, below average claims paying ability, valuable and defensible business
franchises, and a stable operating environment. The level, growth and quality of earnings over
the medium term are of nearly average grade and changes in business/economic circumstances,
as may be envisaged, may greatly impair the underlying fundamentals.
C
Inadequate Earning Prospect.
Insurance Companies rated in this category are adjudged to have weak financial strength and
are limited by one or more of the factors as: a vulnerable or developing business franchise; weak
claims paying ability, weak financial fundamentals; or an unstable operating environment. The
level, growth and quality of earnings over the medium term are of poor grade and changes in
business/economic circumstances, as may be envisaged, may highly impair the underlying
fundamentals.
D Extremely Speculative.
Insurance Companies rated in this category possess very weak intrinsic financial strength,
requiring periodic outside support or suggesting an eventual need for outside assistance. Such
institutions may be limited by one or more of the factors as: a business franchise of questionable
value; inadequate claims paying ability, financial fundamentals that are seriously deficient in one
or more respects; or a highly unstable operating environment. The level, growth and quality of
earnings over the medium term are of speculative grade and changes in business/economic
circumstances, as may be envisaged, may highly impair the underlying fundamentals.
* 1,2,3 refer to above average, average, and below average status in the group
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