AM Best clarifies capital credit rules under IFRS 17 framework

The agency also said net written premiums are replaced by net insurance service revenue.

AM Best said it expects to grant 75% equity credit for the Contractual Service Margin (CSM) and Risk Adjustment (RA) of life business when calculating available capital under its Best’s Capital Adequacy Ratio (BCAR).

The rating agency said full credit will not be given due to market sensitivity, potential volatility, and limits on how these amounts can be used. 

It may also apply partial credit (typically 50%) to other life-related items such as Value of In-Force (VIF) or unallocated surpluses in participating funds. 

These items are considered “soft capital,” and a high reliance on them could weaken balance sheet strength.

AM Best will not give equity credit for CSM from non-life business. For leverage ratios, it will consider but not include these credits in published figures.

For non-life reserving, AM Best adjusts reserves to an economic basis using a 4% discount rate. 

The RA for non-life business is treated as reserve equity, while reserving risk is charged on reserves net of RA.

The agency also said net written premiums are replaced by net insurance service revenue in its pricing risk analysis. It will continue refining its IFRS 17 approach as market practice develops