The Insurance Council of Australia (ICA) says the “unique characteristics” of the Australian market must be considered as Standard & Poor’s (S&P) changes its rating methodology for insurance companies.

The proposed changes will affect how S&P rates insurers worldwide across life, health, general insurance and reinsurance. They aim to make the agency’s criteria more transparent.

In its submission to S&P, ICA warns the ratings agency should acknowledge the Australian context – for example the compulsory superannuation regime, which provides a significant pool of funds to underwrite capital markets.

As a result, “Australian insurers have access to domestic capital markets, even during times of global financial market stress”, and this should be taken into account when assessing risk compared with other countries.

While “robust criteria” are essential, ICA says they are not sufficient to ensure accurate ratings and “there is a danger in artificially enforcing transparency through making the criteria overly prescriptive”.

“The nature and complexity of credit risk means there will always be a considerable subjective element to credit analysis,” it adds.

ICA acknowledges the benefit of introducing explicit “indicators” that pinpoint potential sensitivities at a given rating level, but it questions whether they should be incorporated into ratings in the form of rating caps and other hard thresholds.

It also wants insurers who face a rating adjustment because of the new criteria to have an opportunity to adjust their profiles before the action.

“For confidence-sensitive industries such as insurance, we believe the criteria should more explicitly recognise the willingness of certain insurers to fully utilise the financial flexibility at their disposal in order to support their target rating,” it says.

Among its other suggestions, ICA highlights the need for an explanation of the scores underlying S&P’s insurance industry and country risk assessments, to help insurers better understand them.

Regarding financial risk profiles for insurers, particularly capital adequacy, ICA says it is concerned “S&P may not have adequate resourcing or expertise to produce robust forecasts”.

S&P says the methodology changes will be modest and apply to long-term issuer credit, financial strength and financial enhancement ratings.