Insurance Financial Strength Rating (IFSR) analyzes insurance companies’ ability to repay punctually policyholder obligations and other related obligations. So an IFSR is an insurer’s credit rating that focuses on an insurance company’s ability to meet policyholder obligations.
Insurance companies’ obligations are classified into two broad categories; 1) policyholder obligations(insurance payment) and 2) external financing obligations such as bonds and CPs. And depending on which of the two categories are the focus of rating, there are two types of credit ratings assigned for insurance companies; 1) IFSR, which concerns insurer’s ability to repay policyholder obligations, 2) debt ratings such as CP ratings and senior/subordinated bond ratings, which concern insurer’s short-term and long-term debts.
One characteristic that distinguishes insurance companies from other financial institutions is that most of the obligations of insurance companies comprise of policyholder obligations, which have seniority over other obligations. So in rating an insurance company, IFSR is determined first, and debt ratings are determined by “notch down” process.
IFSR is assigned based on an insurer’s overall ability to meet its policyholder obligations. In IFSR, the object of rating is not a specific issue of debt security but the insurance company itself.
Korea Investors Service introduced Insurance Financial Strength Ratings to provide information on insurance companies’ financial soundness that could be utilized for a wide range of interested parties such as policyholders and transaction counterparties. It is expected that IFSR will provide significant assistance for investors and policyholders in their decisions.
Especially, Article 16 (Principal Guarantee for Defined Contribution Corporate Pension Plan and Individual Retirement Account Reserve) of the Employee Retirement Benefit Protection Act, which took effect in December 2005, and Article 8 (Financial Institutions Entitled to Manage Corporate Pension Plans with Principal Guarantee) state that only the financial institutions rated at BBB- or higher are eligible for management of corporate pension plans with principal guarantee. So it is expected that there will be increasing demands for IFSR from financial institutions for the purpose of meeting the requirement for management of corporate pension plans.
Insurance Financial Strength Rating is classified into plenary rating and surveillance (periodic rating and occasional rating).
Insurance Financial Strength Ratings are valid for one year from the day the rating is assigned.
All Insurance Financial Strength Ratings are, in principle, disclosed to the market through official disclosure channels including KOSCOM, Korea Stock Exchange, Korea Securities Dealers’ Association, Bloomberg, Reuters, Yonhap News, and major institutional investors and media.
IFSR is subject to Watchlist and Outlook systems as are corporate bond rating, issuer rating, etc.
Korea Investors Service introduced Watchlist system on November 1, 1998, which was the first among Korean credit rating agencies. Watchlist is used to indicate that a rating is placed under review for a possible rating change to incorporate changes in factors that affect the issuer’s credit quality.
Many credit rating agencies in the world including Moody’s Investors Service use watchlist as an important part of their credit rating process to meet the need of the market for timely rating updates. When a rating is placed on Watchlist, the direction of expected change (‘Possible Upgrade’, ‘Possible Downgrade’, and ‘Direction Uncertain’) is also posted to assist understanding of users of credit information.
Outlook system was introduced on September 1, 2002. Outlook indicates mid-to-long term (six months to 18 months) prospect on major rating factors at the time the rating is assigned.
Outlook is managed separately from the rating and notch. The direction of actual rating change is not necessarily the same as the direction of Outlook. Outlook is assigned on only long-term ratings. Outlook is not assigned on CP ratings, ABS ratings, ratings on debts that are currently in default, ratings of issuers that are subject to corporate workout programs or the Corporate Restructuring Promotion Act. Outlook is not assigned to credits that are on the Watchlist.
