»Mr. Md. Momin Ullah Patwary, BP. MBA, Director of the company has taken the duties and responsibilities as Managing Director & CEO of NCR Ltd.   
National Credit Ratings Ltd

Life Insurance Rating - Methodology

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Insurer Financial Strength (IFS) rating of a life insurance company assesses the financial strength and its capacity to meet obligations to policyholders on a timely basis. This rating is forward-looking opinion while the liabilities it covers belong necessarily to the future period. Therefore, it is utmost critical that the financial indicators which are depicting a certain risk profile of the insurer remain stable over the medium term. Consequently, the approach that NCR has employed is a blend of qualitative and quantitative data. The quantification helps in achieving objectivity in the rating process while the qualitative side helps in establishing the sustainability of the relevant factors in the foreseeable future. NCR uses the key parameters under qualitative and quantitative assessment is listed below to assess the quality of operations of a life insurance company and the services offered by it. Each parameter is assessed individually; these assessments are then aggregated to arrive at the final rating.




1.1 Governance: NCR considers the independence and effectiveness of the board of directors to be an essential element of a robust governance framework. The board’s oversight of such related party transactions that may lead to conflicts of interest is evaluated. Board oversight of the audit function is also assessed for understanding the safeguard of integrity of an entity’s financial reporting. NCR also assesses the timeliness, quality and comprehensiveness of the information package which goes to the board members prior to each meeting. This enables the members to prepare themselves with reference to the agenda points and participate effectively in the meeting. The committee structure of the board is evaluated in the context of the business needs of the company. NCR believes that an effective board should delegate significant important tasks to each committee for an in-depth and productive deliberation. This would enable the board to evaluate refined representations of the committees and focus only on significant critical issues.



1.2   Management: NCR’s assessment of management focuses on company strategy, risk tolerance and funding policies of the management. NCR reviews management’s track record in terms of its ability to create a healthy business mix, maintain operating efficiency and strengthen market position. Company goals are evaluated to determine if management has an aggressive style dedicated to rapid growth that maximizes near-term earnings or a conservative style geared toward optimizing cash flow over the long term. Although a judgment on the quality of management is subjective, financial performance over time provides a more objective measure.


1.3   Risk Management Framework: The evaluation of the quality of policies, procedures and invariable adherence to those policies and procedures remain pivotal in the assessment of the control environment. Segregation of duties and occupancy of the all important positions would provide comfort as to the minimization of operational risk. NCR, therefore, assesses the quality of the I.T. infrastructure and the breadth and depth of activities performed by this division. Herein, analysis of the integration of the company’s operations into technology would be pivotal. One significant advantage of technology is the timely, precise and accurate MIS. The analysis of MIS being generated by the technology and its use by the department heads and the top management would underpin the comparative advantage (or disadvantage) that the company would have on a relative scale.




1.4    Sponsors’ Support: If the shareholder of the life insurer operator is a corporate entity, NCR traces its steps to reach the individual (group of individuals) who stands behind the corporate entity (or the group). This identification involves knowledge of the history of the sponsors, their expertise, business ideology and other business interests. After identification of the sponsors and their business philosophy, NCR assesses how the life insurer operator fits into that philosophy. Is the life insurer operator core to the sponsor, a strategic investment or just an investment? This would help in forming an opinion regarding what kind of support the sponsors would be providing to the company.


NCR classifies sponsors’ support into two types: a) ongoing support b) extraordinary support. The ongoing support may come in multiple forms, for instance, technology, branding, and marketing. The ongoing support, being the continuing feature, would provide comfort in any of the relevant sections described above. The extraordinary support denotes the support provided in unusual circumstances and may take the form of : i) liquidity injections during crisis, ii) subordinated loans to ease cash flow pressure, iii) recapitalizations to improve capital structure, iv)  arrangement of a solvency rescue package through other market participants. NCR assesses the willingness and ability of the sponsors to provide extraordinary support and incorporate the benefit in the IFS rating of the life insurer operator. The benefit reflects the extent of support and the legal mechanism in place to provide the support.







2.1    Industry Dynamics: The process for IFS rating of the life insurer’s operators builds on NCR’s understanding of the life industry dynamics. This understanding, following an in-depth research approach, is documented. The analysis captures the placement of the local industry in the international context to see the points of identity and distinction. In points of identity, the risks and challenges identified for the international players are re-evaluated for the local players, with a view to see whether the local players have established effective mitigates against those risks and taken due measures to meet the challenges. At the same time, we identify the risks and challenges specific to the local context of the industry. While conducting the analysis, NCR takes a view on industry’s significance in the economic environment of the country, its attractiveness to entrepreneurs, barriers to entry, and the power of suppliers and customers.



2.2      Market Position: Market position reflects the standing of the life insurer in the related market. The stronger this standing states the stronger the company’s ability to sustain pressures on its business volumes and profit margins. This standing takes support from various factors including a) market size, b) growth trend, and c) brand equity.



2.2.1 Market Size: Market size represents the company’s penetration in the chosen market. Size is advantageous as it provides ability to acquire larger business, pricing power and better expense management. There is a strong correlation between an insurer’s absolute and relative size and its market position and brand value. While absolute size is important, it is basically the relative proportion which provides a clear yardstick to analyze the comparative strength of the market players. The more distant a player is from the average on the positive side, the stronger is its ability to reflect the characteristics just mentioned. The quality of risk management guidelines and their invariable implementation is the key to ensuring sustainability in the market position. Aggressive expansion at the expense of underwriting quality is considered a major negative.



2.2.2 Growth Trend: While evaluating the size, NCR looks at the rate of growth. Growth is important as it ensures that the insurer continues to have the ability to meet (or beat) the industry’s benchmarks. As the industry grows, it uplifts the scale of its operational context. This reflects in the ability of the players to invest in human resource, upgrade the control environment, enhance the product slate, increase the outreach and improve the quality of service. To lag the industry’s growth trend means to remain short on all these avenues, putting pressure on the market position.


2.2.3 Brand Equity: An insurer’s brand reflects the strength of its image and reputation in the market, recognition and perception of its products by the distributors and ultimate clients. The brand also commands the clients’ loyalty, ability of the insurer to cross-sell, while bringing down its cost of distribution. Typically, higher and sustainable price trends would highlight the strength of the brand and/or franchise value. This would help the company to strengthen its market share, ensure comparative growth rate and enjoy healthy margins.



2.3       Persistency: One of the measures to gauge the brand loyalty, market perception and reputation of the life insurer is to see the retention rate. Life insurance is generally believed to be a long tailed business unlike general insurance; therefore continuation of the premium is fundamental to life insurance business. An insurer incurs a lot of upfront cost for the acquisition of the business in view of its long term retention. Persistency is important from many perspectives. While persistency implies profitability, it reflects that the client is satisfied with the product and the product provider on an overall basis. This, in turn, is a booster for further generation of business. While first year persistency is a healthy sign, the second year and beyond persistency provides assurance as to the sustainability of premium inflow to the insurer. NCR considers those insurers having excellent ability which are capable of replicating largely the same premium in the succeeding years as in the first year.



2.4  Diversification: Diversification encompasses many aspects which govern the business model of an insurer. The rationale for this is that diversification enhances the ability of the insurer to meet challenges, both present and upcoming. The lack of diversification gives rise to concentration risk, reflecting vulnerability of the insurer to few elements. Concentration is considered a major negative because it limits the insurer’s ability to ensure sustainability in its business let alone expand it. At the same time, it enhances the risk of disruption in the operations if the area of concentration goes wrong. This entails diversification in the distribution channels, premium mix, product line, client base and geographic spread.

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