Fitch publishes new capital adequacy measure

Fitch Ratings has published details about its new financial guaranty capital model called Matrix. The key measure in the model is the Core Capital Adequacy Ratio (CCAR), derived two basic measures: (1) the total Adjusted Claims-Paying Resources (ACPR), and (2) the total Required Claims-Paying Resources (RCPR).

Components making up an insurer’s ACPR include things such as policyholders’ surplus, unearned premium reserves, loss and LAE reserves, equity-like soft capital facilities (such as contingent preferred stock put facilities) and the present value of future installment premiums.

These would be subtracted by the required capital needed to support factor-based charges for exposures, including investment portfolio and guaranteed investment contracts (GICs), as well as adjustments made to the present value of installment premiums for simulated bond defaults.

RCPR includes the present value of dynamically-generated insured portfolio claims, simulated over a 10-year time horizon. Subtracted from this would be credit provided for reinsurance or reinsurance-like soft capital credit facilities.

CCAR is determined by dividing the company’s ACPR by the company’s RCPR. “Each [financial] guarantor at a minimum must be at 1.00x for its given rating threshold,” Fitch says in a release announcing the new model.