Response to cP on Guidelines on Credit Risk Mitigation for institutions applying the IRB approach with own estimates of LGDs
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B. As part of Section 2.4.5 of the Call for advice to the EBA by the European Commission (Ref. Ares(2018)2374104 - 04/05/2018 ) and also as part of Paragraph 29a.ii of the Draft Guidelines (p.35; see also paragraph 33 which references “comparable exposure”) we request that EBA should take under consideration the qualification of the priority claim on insurance undertakings as guarantors that credit institutions (hereafter ‘banks’) hold as policyholders, and this compared to any other guarantor type. The exposure to credit insurance undertakings is not comparable to the bank’s exposure as creditor, as policyholders are in a privileged position compared to unsecured creditors (see point 1.4 below). Therefore, we believe that banks should be allowed to recognise (depending on the jurisdiction and its respective insurance regulations) the improved LGD of its exposure as policyholder, based on the risk differentiators set forth hereafter.
Supporting Arguments:
1. Key risk differentiators that should be permitted to be taken into account in modelling the PD and LGD of banks’ claims as policyholders
1.1. The fact that the (single situation) credit insurance is correlated neither with the insurers’ other exposures nor with the banks’ exposure to the underlying obligor substantially lowers any systemic risk:
1.1.1. Regulatory and reserving requirements ensure adequate callable capital is available to pay claims to all policyholders.
1.1.2. The insurance industry’s ability to absorb large losses is well tested: the figure paid by insurers during the global financial crisis – the most severe test of the single situation credit insurance product to date – was roughly EUR 2.5 billion. The losses were roughly an additional EUR 5 billion for the short-term whole turnover credit insurers. During the same period the overall insurance and Re-insurance industry (often including the same undertakings involved in single situation credit insurance for banks) handled roughly EUR 100 billion in natural catastrophe losses. Evidence of the resilience of the insurance market is also reflected in the figures from 2017: insurers paid roughly EUR 144 billion due to hurricanes and other natural catastrophes, with no recoveries expected from these losses; yet additional capital has already replaced the losses.
1.2. The banks’ claims as policyholders are in a privileged position compared to unsecured creditors’ claims in the unlikely event of the bankruptcy of an insurer. EU regulated and supervised insurance undertakings have minimal, if any, preferential debt. Furthermore, borrowings by insurance groups are done at the holding level, outside the regulated entity, which holds the capital and thus are structurally subordinated: the debt ratings of insurance groups are lower than the claims paying rating of an insurer, as reflected in ratings of insurers published by credit rating agencies.
1.3. Banks’ claims as policyholders benefit from ring-fencing of assets to secure outstanding liabilities to policyholders at the operating insurance undertaking level; bolstered in circumstances where the insurer (guarantor) is in distress by provisioning required by insurance regulators for exposures where the insurer has a potential claim liability. This ring-fencing of assets for the benefit of banks as policyholders should be recognised by the EU in its transposition into EU legislation of the Basel III standards and the LGD should better reflect the strong regulation and supervision of the insurance sector in the EU, to acknowledge this benefit to banks as policyholders, rather than considering the banks as unsecured creditors of an insurance undertaking.
1.4. (Single situation) Credit insurance assists banks with effective credit risk transfer and reduces balance sheet volatility. Insurers and their reinsurers’ regulated capital and diverse portfolios of exposures outside the banks related risks (property, energy, marine, trade, etc.) protect them from financial markets volatility and any correlation with banks’ systemic risks on the liability side (as proven in 2009).
2. (single situation) credit insurance has unique advantages, particularly when compared to credit derivatives
2.1. Claims performance is within the control of the bank: a recent survey of the top 9 insurance brokers of (single situation) credit insurance for regulated banks over the period 2007-2017 reported that 97% of claims made were paid on time/in full; the remainder were “compromised” due to operational failures on the part of the insured financial institution – and yet 44% of the “compromised” amounts claimed were still paid in settlement agreements. There was never a non-payment of a claim due to an insurer’s default.
2.2. The insurance claim process is much more in the control of the bank than other CRM tools , as per below:
2.3 The policy wording is already tailored to the specific exposures that the bank has and the bank has a direct relationship with the insurer, allowing communication and certainty during the claims process.
2.4 A claim can be made if the workout has not been agreed by the time the cure/claim settlement period has elapsed
2.4.1 The claims payment process is highly prescribed and includes a detailed timeframe and specifies the steps and information the bank must take or provide to successfully conclude the process.
2.4.2 The insured’s rights under the contract, including damages for late payment, are protected by law and in some jurisdictions also by precedent.
2.4.3 The policy allows for active engagement by the insured bank to ensure its claim is processed in an acceptable manner.
B. In addition to this allowance for discretion in the case of A-IRB banks, we would welcome the EBA’s support to have this flexibility on LGD estimation to be considered for all banks.
C. This is also a concern that we would welcome if it would be addressed by the EBA in responding to the Call for Advice of May 2018 (Section 2.4.5), regarding the “new requirement to treat guaranteed exposures under the same approach that the institution applies for direct exposures to the guarantor”.
Supporting Arguments:
3 Privileged position of policyholders
3.3 “The main objective of insurance and reinsurance regulation and supervision is the adequate protection of policy holders and beneficiaries.” . Therefore, as stated in the Solvency II directive: “The Solvency Capital Requirement should reflect a level of eligible own funds that enables insurance and reinsurance undertakings to absorb significant losses and that gives reasonable assurance to policy holders and beneficiaries that payments will be made as they fall due.” .
3.4 Solvency II was created with the explicit intention to continue to protect the priority ranking of policyholders as evidenced in consideration 127 : “It is of utmost importance that insured persons, policy holders, beneficiaries and any injured party having a direct right of action against the insurance undertaking on a claim arising from insurance operations be protected in winding-up proceedings. Member States should be provided with a choice between equivalent methods to ensure special treatment for insurance creditors, none of those methods impeding a Member State from establishing a ranking between different categories of insurance claim. Furthermore, an appropriate balance should be ensured between the protection of insurance creditors and other privileged creditors protected under the legislation of the Member State concerned.”
3.5 This intention is reflected in Article 275 of the Solvency II directive:
“1. Member States shall ensure that insurance claims take precedence over other claims against the insurance undertaking in one or both of the following ways:
(a) with regard to assets representing the technical provisions, insurance claims shall take absolute precedence over any other claim on the insurance undertaking; or
(b) with regard to the whole of the assets of the insurance undertaking, insurance claims shall take precedence over any other claim on the insurance undertaking with the only possible exception of the following:
(i) claims by employees arising from employment contracts and employment relationships;
(ii) claims by public bodies on taxes;
(iii) claims by social security systems;
(iv) claims on assets subject to rights in rem.”
3.6 Fitch Ratings, having established the value available to creditors and the approximate scale of creditors at each level of priority, applies a waterfall to determine estimated recovery ratios, based on the expected relative recovery characteristics of an obligation upon curing of a default, emergence from insolvency, or following the liquidation or termination of the obligor or its associated collateral. According to Fitch Ratings , the typical order of seniority of creditors at operating company level is as follows:
1. Policyholder obligations with seniority (for example, life insurance policyholders in certain jurisdictions)
2. Policyholder obligations without seniority
3. Secured debt
4. Unsecured senior debt
5. Subordinated debt
6. Hybrids
3.7 As noted in the Fitch Recovery Rating scale replicated below , recovery rates for policyholders could be expected to be well above the recovery rate implied by the 45% LGD floor currently prescribed for financial institutions including insurance undertakings.
3.7.1 Credit Rating agencies determine an Insurance Financial Strength (IFS) rating, which provides an indication of an insurer’s capacity to pay its insurance claim and benefit obligations. An Issuer Default Rating (IDR) is also issued, which is a rating assigned to the company itself and it provides an indication of default or failure risk. The IFS serves as the initial “anchor rating” in the notching process. Depending on the regulatory regime, an operating company’s IDR is normally notched at least one notch down from its IFS rating, given the average recovery assumption.
A. Following the public hearing on 15th of April we understand from the answers provided by the EBA that the EBA allows A-IRB banks some discretion on LGD for exposure to insurance undertakings. We would kindly request that this understanding is made more explicit in the EBA Proposed Guidance for the Estimation of the LGD. This discretion is supported by the preferential status that banks have as policyholders to insurance undertakings, where the bank purchases a guarantee in the form of a (single situation) credit insurance policy. This preferential status is different to the status of the bank as an unsecured creditor.
B. In addition to this allowance for discretion in the case of A-IRB banks, we would welcome the EBA’s support to have this flexibility on LGD estimation to be considered for all banks.
C. This is also a concern that we would welcome if it would be addressed by the EBA in responding to the Call for Advice of May 2018 (Section 2.4.5), regarding the “new requirement to treat guaranteed exposures under the same approach that the institution applies for direct exposures to the guarantor”.
Supporting Arguments:
3 Privileged position of policyholders
3.3 “The main objective of insurance and reinsurance regulation and supervision is the adequate protection of policy holders and beneficiaries.” . Therefore, as stated in the Solvency II directive: “The Solvency Capital Requirement should reflect a level of eligible own funds that enables insurance and reinsurance undertakings to absorb significant losses and that gives reasonable assurance to policy holders and beneficiaries that payments will be made as they fall due.” .
3.4 Solvency II was created with the explicit intention to continue to protect the priority ranking of policyholders as evidenced in consideration 127 : “It is of utmost importance that insured persons, policy holders, beneficiaries and any injured party having a direct right of action against the insurance undertaking on a claim arising from insurance operations be protected in winding-up proceedings. Member States should be provided with a choice between equivalent methods to ensure special treatment for insurance creditors, none of those methods impeding a Member State from establishing a ranking between different categories of insurance claim. Furthermore, an appropriate balance should be ensured between the protection of insurance creditors and other privileged creditors protected under the legislation of the Member State concerned.”
3.5 This intention is reflected in Article 275 of the Solvency II directive:
“1. Member States shall ensure that insurance claims take precedence over other claims against the insurance undertaking in one or both of the following ways:
(a) with regard to assets representing the technical provisions, insurance claims shall take absolute precedence over any other claim on the insurance undertaking; or
(b) with regard to the whole of the assets of the insurance undertaking, insurance claims shall take precedence over any other claim on the insurance undertaking with the only possible exception of the following:
(i) claims by employees arising from employment contracts and employment relationships;
(ii) claims by public bodies on taxes;
(iii) claims by social security systems;
(iv) claims on assets subject to rights in rem.”
3.6 Fitch Ratings, having established the value available to creditors and the approximate scale of creditors at each level of priority, applies a waterfall to determine estimated recovery ratios, based on the expected relative recovery characteristics of an obligation upon curing of a default, emergence from insolvency, or following the liquidation or termination of the obligor or its associated collateral. According to Fitch Ratings , the typical order of seniority of creditors at operating company level is as follows:
1. Policyholder obligations with seniority (for example, life insurance policyholders in certain jurisdictions)
2. Policyholder obligations without seniority
3. Secured debt
4. Unsecured senior debt
5. Subordinated debt
6. Hybrids
3.7 As noted in the Fitch Recovery Rating scale replicated below , recovery rates for policyholders could be expected to be well above the recovery rate implied by the 45% LGD floor currently prescribed for financial institutions including insurance undertakings.
3.7.1 Credit Rating agencies determine an Insurance Financial Strength (IFS) rating, which provides an indication of an insurer’s capacity to pay its insurance claim and benefit obligations. An Issuer Default Rating (IDR) is also issued, which is a rating assigned to the company itself and it provides an indication of default or failure risk. The IFS serves as the initial “anchor rating” in the notching process. Depending on the regulatory regime, an operating company’s IDR is normally notched at least one notch down from its IFS rating, given the average recovery assumption.
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Question 1: Do you agree with the proposed clarifications on eligibility requirements in accordance with Article 181(1)(f) of the CRR?
NoQuestion 2: Do you agree with the proposed clarifications on the assessment of legal certainty of movable physical collateral? How do you currently perform the assessment of legal effectiveness and enforceability for movable physical collateral?
NoQuestion 2: Do you agree with the proposed clarifications on the assessment of legal certainty of movable physical collateral? How do you currently perform the assessment of legal effectiveness and enforceability for movable physical collateral?
NoQuestion 4: Do you have specific concerns related to the recognition of collateral in the modelling of LGD? How do you currently recognise collateral in your LGD estimates?
NoQuestion 5: What approaches for the recognition of the unfunded credit protection do you currently use? What challenges would there be in applying approaches listed above for the recognition of unfunded credit protection?
NAQuestion 6: Do you have any specific concerns related to the issues excluded from the scope of the Guidelines?
A. We would respectfully request the support of the European Banking Authority in amending Article 215 of the Capital Requirements Regulation (CRR) (“Additional requirements for guarantees”) to reflect word for word the Bank Committee on Banking Supervision’s International Convergence of Capital Measurement and Capital Standards (June 2006) in order to avoid any discrepancy in the interpretation of either provision.B. As part of Section 2.4.5 of the Call for advice to the EBA by the European Commission (Ref. Ares(2018)2374104 - 04/05/2018 ) and also as part of Paragraph 29a.ii of the Draft Guidelines (p.35; see also paragraph 33 which references “comparable exposure”) we request that EBA should take under consideration the qualification of the priority claim on insurance undertakings as guarantors that credit institutions (hereafter ‘banks’) hold as policyholders, and this compared to any other guarantor type. The exposure to credit insurance undertakings is not comparable to the bank’s exposure as creditor, as policyholders are in a privileged position compared to unsecured creditors (see point 1.4 below). Therefore, we believe that banks should be allowed to recognise (depending on the jurisdiction and its respective insurance regulations) the improved LGD of its exposure as policyholder, based on the risk differentiators set forth hereafter.
Supporting Arguments:
1. Key risk differentiators that should be permitted to be taken into account in modelling the PD and LGD of banks’ claims as policyholders
1.1. The fact that the (single situation) credit insurance is correlated neither with the insurers’ other exposures nor with the banks’ exposure to the underlying obligor substantially lowers any systemic risk:
1.1.1. Regulatory and reserving requirements ensure adequate callable capital is available to pay claims to all policyholders.
1.1.2. The insurance industry’s ability to absorb large losses is well tested: the figure paid by insurers during the global financial crisis – the most severe test of the single situation credit insurance product to date – was roughly EUR 2.5 billion. The losses were roughly an additional EUR 5 billion for the short-term whole turnover credit insurers. During the same period the overall insurance and Re-insurance industry (often including the same undertakings involved in single situation credit insurance for banks) handled roughly EUR 100 billion in natural catastrophe losses. Evidence of the resilience of the insurance market is also reflected in the figures from 2017: insurers paid roughly EUR 144 billion due to hurricanes and other natural catastrophes, with no recoveries expected from these losses; yet additional capital has already replaced the losses.
1.2. The banks’ claims as policyholders are in a privileged position compared to unsecured creditors’ claims in the unlikely event of the bankruptcy of an insurer. EU regulated and supervised insurance undertakings have minimal, if any, preferential debt. Furthermore, borrowings by insurance groups are done at the holding level, outside the regulated entity, which holds the capital and thus are structurally subordinated: the debt ratings of insurance groups are lower than the claims paying rating of an insurer, as reflected in ratings of insurers published by credit rating agencies.
1.3. Banks’ claims as policyholders benefit from ring-fencing of assets to secure outstanding liabilities to policyholders at the operating insurance undertaking level; bolstered in circumstances where the insurer (guarantor) is in distress by provisioning required by insurance regulators for exposures where the insurer has a potential claim liability. This ring-fencing of assets for the benefit of banks as policyholders should be recognised by the EU in its transposition into EU legislation of the Basel III standards and the LGD should better reflect the strong regulation and supervision of the insurance sector in the EU, to acknowledge this benefit to banks as policyholders, rather than considering the banks as unsecured creditors of an insurance undertaking.
1.4. (Single situation) Credit insurance assists banks with effective credit risk transfer and reduces balance sheet volatility. Insurers and their reinsurers’ regulated capital and diverse portfolios of exposures outside the banks related risks (property, energy, marine, trade, etc.) protect them from financial markets volatility and any correlation with banks’ systemic risks on the liability side (as proven in 2009).
2. (single situation) credit insurance has unique advantages, particularly when compared to credit derivatives
2.1. Claims performance is within the control of the bank: a recent survey of the top 9 insurance brokers of (single situation) credit insurance for regulated banks over the period 2007-2017 reported that 97% of claims made were paid on time/in full; the remainder were “compromised” due to operational failures on the part of the insured financial institution – and yet 44% of the “compromised” amounts claimed were still paid in settlement agreements. There was never a non-payment of a claim due to an insurer’s default.
2.2. The insurance claim process is much more in the control of the bank than other CRM tools , as per below:
2.3 The policy wording is already tailored to the specific exposures that the bank has and the bank has a direct relationship with the insurer, allowing communication and certainty during the claims process.
2.4 A claim can be made if the workout has not been agreed by the time the cure/claim settlement period has elapsed
2.4.1 The claims payment process is highly prescribed and includes a detailed timeframe and specifies the steps and information the bank must take or provide to successfully conclude the process.
2.4.2 The insured’s rights under the contract, including damages for late payment, are protected by law and in some jurisdictions also by precedent.
2.4.3 The policy allows for active engagement by the insured bank to ensure its claim is processed in an acceptable manner.
Question 7: Do you agree with the proposed clarification regarding the parallel treatment of ineligible UFCP and ineligible FCP? How do you currently monitor the cash flows related to ineligible unfunded credit protection and how do you treat such cash flows with regard to the PD and LGD estimates?
NAQuestion 8: Do you agree with the proposed rules for the application of the substitution approach? Do you see any operational limitations in excluding the guaranteed part of exposure to which substitution approach is applied from the scope of application of the LGD model for unguaranteed exposures?
NAQuestion 9: Do you agree with the proposed rules for the application of the modelling approach?
NAQuestion 10: What challenges would you envisage for back-testing the substitution approach? Do you agree that the back-testing should be performed rather at Expected loss level? Do you have any approach currently in place for the back-testing of substitution approach?
NAQuestion 11: Do you agree with the proposed guidance for the estimation of the LGD of comparable direct exposure towards the guarantor? What concerns would you have about the calculation of the risk weight floor?
A. Following the public hearing on 15th of April we understand from the answers provided by the EBA that the EBA allows A-IRB banks some discretion on LGD for exposure to insurance undertakings. We would kindly request that this understanding is made more explicit in the EBA Proposed Guidance for the Estimation of the LGD. This discretion is supported by the preferential status that banks have as policyholders to insurance undertakings, where the bank purchases a guarantee in the form of a (single situation) credit insurance policy. This preferential status is different to the status of the bank as an unsecured creditor.B. In addition to this allowance for discretion in the case of A-IRB banks, we would welcome the EBA’s support to have this flexibility on LGD estimation to be considered for all banks.
C. This is also a concern that we would welcome if it would be addressed by the EBA in responding to the Call for Advice of May 2018 (Section 2.4.5), regarding the “new requirement to treat guaranteed exposures under the same approach that the institution applies for direct exposures to the guarantor”.
Supporting Arguments:
3 Privileged position of policyholders
3.3 “The main objective of insurance and reinsurance regulation and supervision is the adequate protection of policy holders and beneficiaries.” . Therefore, as stated in the Solvency II directive: “The Solvency Capital Requirement should reflect a level of eligible own funds that enables insurance and reinsurance undertakings to absorb significant losses and that gives reasonable assurance to policy holders and beneficiaries that payments will be made as they fall due.” .
3.4 Solvency II was created with the explicit intention to continue to protect the priority ranking of policyholders as evidenced in consideration 127 : “It is of utmost importance that insured persons, policy holders, beneficiaries and any injured party having a direct right of action against the insurance undertaking on a claim arising from insurance operations be protected in winding-up proceedings. Member States should be provided with a choice between equivalent methods to ensure special treatment for insurance creditors, none of those methods impeding a Member State from establishing a ranking between different categories of insurance claim. Furthermore, an appropriate balance should be ensured between the protection of insurance creditors and other privileged creditors protected under the legislation of the Member State concerned.”
3.5 This intention is reflected in Article 275 of the Solvency II directive:
“1. Member States shall ensure that insurance claims take precedence over other claims against the insurance undertaking in one or both of the following ways:
(a) with regard to assets representing the technical provisions, insurance claims shall take absolute precedence over any other claim on the insurance undertaking; or
(b) with regard to the whole of the assets of the insurance undertaking, insurance claims shall take precedence over any other claim on the insurance undertaking with the only possible exception of the following:
(i) claims by employees arising from employment contracts and employment relationships;
(ii) claims by public bodies on taxes;
(iii) claims by social security systems;
(iv) claims on assets subject to rights in rem.”
3.6 Fitch Ratings, having established the value available to creditors and the approximate scale of creditors at each level of priority, applies a waterfall to determine estimated recovery ratios, based on the expected relative recovery characteristics of an obligation upon curing of a default, emergence from insolvency, or following the liquidation or termination of the obligor or its associated collateral. According to Fitch Ratings , the typical order of seniority of creditors at operating company level is as follows:
1. Policyholder obligations with seniority (for example, life insurance policyholders in certain jurisdictions)
2. Policyholder obligations without seniority
3. Secured debt
4. Unsecured senior debt
5. Subordinated debt
6. Hybrids
3.7 As noted in the Fitch Recovery Rating scale replicated below , recovery rates for policyholders could be expected to be well above the recovery rate implied by the 45% LGD floor currently prescribed for financial institutions including insurance undertakings.
3.7.1 Credit Rating agencies determine an Insurance Financial Strength (IFS) rating, which provides an indication of an insurer’s capacity to pay its insurance claim and benefit obligations. An Issuer Default Rating (IDR) is also issued, which is a rating assigned to the company itself and it provides an indication of default or failure risk. The IFS serves as the initial “anchor rating” in the notching process. Depending on the regulatory regime, an operating company’s IDR is normally notched at least one notch down from its IFS rating, given the average recovery assumption.
A. Following the public hearing on 15th of April we understand from the answers provided by the EBA that the EBA allows A-IRB banks some discretion on LGD for exposure to insurance undertakings. We would kindly request that this understanding is made more explicit in the EBA Proposed Guidance for the Estimation of the LGD. This discretion is supported by the preferential status that banks have as policyholders to insurance undertakings, where the bank purchases a guarantee in the form of a (single situation) credit insurance policy. This preferential status is different to the status of the bank as an unsecured creditor.
B. In addition to this allowance for discretion in the case of A-IRB banks, we would welcome the EBA’s support to have this flexibility on LGD estimation to be considered for all banks.
C. This is also a concern that we would welcome if it would be addressed by the EBA in responding to the Call for Advice of May 2018 (Section 2.4.5), regarding the “new requirement to treat guaranteed exposures under the same approach that the institution applies for direct exposures to the guarantor”.
Supporting Arguments:
3 Privileged position of policyholders
3.3 “The main objective of insurance and reinsurance regulation and supervision is the adequate protection of policy holders and beneficiaries.” . Therefore, as stated in the Solvency II directive: “The Solvency Capital Requirement should reflect a level of eligible own funds that enables insurance and reinsurance undertakings to absorb significant losses and that gives reasonable assurance to policy holders and beneficiaries that payments will be made as they fall due.” .
3.4 Solvency II was created with the explicit intention to continue to protect the priority ranking of policyholders as evidenced in consideration 127 : “It is of utmost importance that insured persons, policy holders, beneficiaries and any injured party having a direct right of action against the insurance undertaking on a claim arising from insurance operations be protected in winding-up proceedings. Member States should be provided with a choice between equivalent methods to ensure special treatment for insurance creditors, none of those methods impeding a Member State from establishing a ranking between different categories of insurance claim. Furthermore, an appropriate balance should be ensured between the protection of insurance creditors and other privileged creditors protected under the legislation of the Member State concerned.”
3.5 This intention is reflected in Article 275 of the Solvency II directive:
“1. Member States shall ensure that insurance claims take precedence over other claims against the insurance undertaking in one or both of the following ways:
(a) with regard to assets representing the technical provisions, insurance claims shall take absolute precedence over any other claim on the insurance undertaking; or
(b) with regard to the whole of the assets of the insurance undertaking, insurance claims shall take precedence over any other claim on the insurance undertaking with the only possible exception of the following:
(i) claims by employees arising from employment contracts and employment relationships;
(ii) claims by public bodies on taxes;
(iii) claims by social security systems;
(iv) claims on assets subject to rights in rem.”
3.6 Fitch Ratings, having established the value available to creditors and the approximate scale of creditors at each level of priority, applies a waterfall to determine estimated recovery ratios, based on the expected relative recovery characteristics of an obligation upon curing of a default, emergence from insolvency, or following the liquidation or termination of the obligor or its associated collateral. According to Fitch Ratings , the typical order of seniority of creditors at operating company level is as follows:
1. Policyholder obligations with seniority (for example, life insurance policyholders in certain jurisdictions)
2. Policyholder obligations without seniority
3. Secured debt
4. Unsecured senior debt
5. Subordinated debt
6. Hybrids
3.7 As noted in the Fitch Recovery Rating scale replicated below , recovery rates for policyholders could be expected to be well above the recovery rate implied by the 45% LGD floor currently prescribed for financial institutions including insurance undertakings.
3.7.1 Credit Rating agencies determine an Insurance Financial Strength (IFS) rating, which provides an indication of an insurer’s capacity to pay its insurance claim and benefit obligations. An Issuer Default Rating (IDR) is also issued, which is a rating assigned to the company itself and it provides an indication of default or failure risk. The IFS serves as the initial “anchor rating” in the notching process. Depending on the regulatory regime, an operating company’s IDR is normally notched at least one notch down from its IFS rating, given the average recovery assumption.
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