A.M. Best Report: Understanding BCAR for Canadian Property/Casualty Insurers.OLDWICK, N.J. -- The objective of A.M. Best Co.'s rating system is to provide an opinion of an insurer's financial strength and ability to meet ongoing obligations to policyholders. Based on a recently released rating methodology, the assignment of an interactive rating is derived from an in-depth evaluation of a company's balance sheet strength, operating performance and business profile as compared with A.M. Best's quantitative and qualitative standards. A.M. Best's quantitative evaluation is based on an analysis of more than 100 key financial tests and supporting data. These tests, which underlie the evaluation of balance sheet strength and operating performance, vary in their importance depending on a company's characteristics. A company's quantitative results are evaluated on their own merits and also are compared with industry composites as established by A.M. Best. Composite standards are based on the performance of other Canadian insurance companies This is a partial list of Canadian insurance companies:
A company's underwriting, financial and asset leverage are subjected to an evaluation by Best's Capital Adequacy Ratio Capital adequacy ratio (CAR), also called Capital to Risk (Weighted) Assets Ratio (CRAR)[], is a ratio of a bank's capital to its risk. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount of loss. (BCAR BCAR Brunswick County Association of Realtors BCAR British Civil Airworthiness Requirements BCAR Bullitt County Animal Rescue (Shepherdsville, KY) BCAR Business Case Analysis Report BCAR Beaver Creek Array BCAR Buffalo Civic Auto Ramps, Inc. ), which allows for an integrated review of these leverage areas. BCAR calculates the net required capital to support the financial risks of the company associated with the exposure of assets and underwriting to adverse economic and market conditions and compares it with economic capital. Some of the stress tests within BCAR include above-normal catastrophes, a decline in equity markets and a rise in interest rates. This integrated stress evaluation permits a more discerning view of a company's balance sheet strength relative to its operating risks Operating risk The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is created by operating leverage. Also called business risk. . Structurally, A.M. Best's Canadian BCAR model is adapted specifically to the Canadian P&C-1 and P&C-2 Annual Statements as well as Canada's GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). (generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting ) accounting standards. A.M. Best's Canadian capital Noun 1. Canadian capital - the capital of Canada (located in southeastern Ontario across the Ottawa river from Quebec) capital of Canada, Ottawa Ontario - a prosperous and industrialized province in central Canada formula takes a risk-based capital approach. Net required capital is calculated to support three broad risk categories: investment risk, credit risk and underwriting risk. However, A.M. Best's capital adequacy formula contains an adjustment for covariance Covariance A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means returns vary inversely. , reflecting the statistical independence of the individual components. A company's adjusted surplus is divided by its net required capital, after the covariance adjustment, to determine its BCAR. A.M. Best makes a number of adjustments to a company's reported surplus within the Canadian capital model to provide a more economic and comparable basis for evaluating capital adequacy. Goodwill and other intangible assets Intangible Asset An asset that is not physical in nature. Notes: Examples are things like copyrights, patents, intellectual property, and goodwill. These are the opposite of tangible assets. are eliminated. Other significant adjustments are related largely to equity, or economic values, imbedded in loss and loss-adjustment expense reserves, fixed-income securities Fixed-income securities Investments that have specific interest rates, such as bonds. and common stocks. Further adjustments are made to surplus to reflect the pricing risk inherent in unearned premium reserves and nonbalance sheet risks, including catastrophe exposures and debt-service requirements. Generally, more than two-thirds of a company's gross capital requirement within A.M. Best's Canadian capital model is generated from its loss reserve and net premiums written components. Consequently, a company's absolute BCAR value is influenced largely by the capital required to support its net underwriting commitment, which in turn is largely a function of its business mix, surplus size, stability of loss development, profitability, loss reserve adequacy and length of claims payout. While only one-third of the gross capital requirement is generated from investment risk, interest-rate risk and credit risk components, a company that maintains a more aggressive investment portfolio, is heavily dependent on pyramided capital, has excessive credit risk or is excessively dependent on reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. , likely will generate a lower BCAR value. To access the BCAR rating methodology for Canadian P/C insurers, please visit http://www.ambest.com/ratings/methodology. A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at http://www.ambest.com. |
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