Methodology for Assigning Credit Ratings to …...2020/06/30 · Credit ratings assigned under this methodology are reviewed pursuant to the requirements of the Federal Law No. 222-FZ,

Methodology for Assigning Credit Ratings to Insurance

Organizations on the National Scale for the Russian

Federation

June 30, 2020

June 30, 2020 Methodology for Assigning Credit Ratings to Insurance Organizations

on the National Scale for the Russian Federation

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Table of Contents

1 Scope of the Methodology ....................................................................................................................... 3

2 Sources of Information Used to Assign a Credit Rating ............................................................. 4

3 Short Overview of the Rating Analysis Structure ................................................................................. 5

4 Determining the Standalone Creditworthiness Assessment Score................................................ 7

4.1. Business Profile ................................................................................................................................ 8

4.1.1. Quality of the External Environment ........................................................................... 9

4.1.2. Market Position ................................................................................................................ 11

4.1.3. Operating Metrics............................................................................................................ 15

4.2. Financial Profile Assessment ..................................................................................................... 18

4.2.1. Capital Adequacy Assessment .................................................................................... 19

4.2.2. Quality of Assets .............................................................................................................. 24

4.2.3. Liquidity ............................................................................................................................... 27

4.3. Assessment of Management Quality ..................................................................................... 31

4.3.1. Experience and Structure of the Management Team ......................................... 32

4.3.2. Strategic Vision and Management ............................................................................ 33

4.3.3. Actuarial Function ............................................................................................................ 33

4.3.4. Risk Management ............................................................................................................ 34

4.3.5. Corporate Governance .................................................................................................. 34

4.4. Additional Adjustments............................................................................................................... 35

5 Credit Rating Outlook .................................................................................................................................. 36

6 Assigning Ratings to Various Debt Instruments ................................................................................. 36

7 Approach to Verification of Fairness of the Methodology in Accordance

with Federal Law FZ-222 ............................................................................................................................. 37

8 Key Indicators Used in Analysis ................................................................................................................ 37



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1 Scope of the Methodology

This methodology of the Analytical Credit Rating Agency (hereinafter, ACRA or the Agency)

defines the criteria for assessing the creditworthiness of insurance organizations (including

reinsurance organizations) with a license to engage in a relevant type of insurance activity in

the manner set forth in the legislation of the Russian Federation. The methodology, however,

does not apply to:

insurance organizations engaged, to a substantial extent, in insuring entrepreneurial

risks in connection with losses from entrepreneurial activities due to a breach by the

entrepreneur’s counterparties of their obligations;

health insurance organizations engaged, to a predominant extent, in compulsory health

insurance;

mutual insurance companies.

The Agency is the one to declare the extent of engagement to be substantial or predominant.

This methodology or its elements may be used in assessing the creditworthiness of other

organizations to the extent of their insurance activities or any activities that are similar, in their

economic substance, to insurance.

If an organization holds significant investments in banking companies, finance leasing

companies, or other companies, a number of additional methodologies may be used for

assessment of such investments, depending on the industry. ACRA may use other specialized

methodologies as well, if they contribute to a more exact assessment of the necessary rating

factors.

This methodology is applied on an ongoing basis until a new version is approved by ACRA’s

methodology committee.

Credit ratings assigned under this methodology are reviewed pursuant to the requirements of

the Federal Law No. 222-FZ, of July 13, 2015, on the Activities of Credit Rating Agencies in the

Russian Federation, Amending Section 76.1 of the Federal Law on the Central Bank of the

Russian Federation (Bank of Russia), and Declaring Certain Provisions of Legislative Instruments

of the Russian Federation to Be No Longer in Force, and in accordance with ACRA’s internal

documents, but no later than one calendar year from the date of the latest rating action.

To keep the methodology up to date, ACRA reviews and amends this methodology for the

following reasons:

more than three deviations from this methodology in a quarter, when performing rating

actions pursuant to this methodology;

a need to review based on the results of methodology application monitoring by the

staff of the methodology group;

identifying noncompliance with the requirements of the Federal Law No. 222-FZ, of July

13, 2015, on the Activities of Credit Rating Agencies in the Russian Federation, Amending

Section 76.1 of the Federal Law on the Central Bank of the Russian Federation (Bank of

Russia), and Declaring Certain Provisions of Legislative Instruments of the Russian

Federation to Be No Longer in Force;

immediate review of the methodology is requested by the compliance control service.



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ACRA reviews the methodology in accordance with ACRA’s internal documents no later than

one calendar year from the date of its latest review. Based on the review, the methodology may

be amended or left unchanged.

In case any errors are found in this methodology that have affected or can affect credit ratings

and/or credit rating outlooks, ACRA will analyze and review it in accordance with the

procedures established in ACRA. Information about such actions and a new version of the

methodology will be provided to the Bank of Russia in the manner set forth by the Bank of

Russia. If the identified methodology errors affect previously assigned ratings, ACRA discloses

that information on its official website at www.acra-ratings.ru.

If the proposed changes to this methodology are material (such as modification of individual

factors or the wording of the methodology) and affect or can affect the existing credit ratings,

ACRA will:

1) provide the Bank of Russia with information about the proposed changes in the

methodology applied, stating the reasons for, and implications of, such changes,

including effect on credit ratings assigned in accordance with the methodology, and

also post such information on its official website at www.acra-ratings.ru;

2) no later than within six months of the day of amending the methodology applied, carry

out prospective and retrospective analysis of possible associated changes in rating

assessment scores assigned in accordance with this methodology;

3) no later than within six months of the day of amending the methodology applied, review

credit ratings, if the need to review them is discovered based on the conducted

assessment.

2 Sources of Information Used to Assign a Credit Rating

The rated entity’s audited IFRS or US GAAP statements (including the auditor’s opinion and

notes to the statements) for the last three complete financial years are the main source of

information in the course of rating analysis. If the organization produces IFRS or US GAAP

statements on a quarterly and/or half-year basis, they are also used in rating analysis.

In assigning ratings, ACRA also uses the following information sources:

accounting / financial reporting forms and reporting forms for the purposes of

supervision of insurers;

the organization’s constituent documents;

individual questionnaire of the rated entity, completed on the Agency’s form;

reports by the specialist custodian on the rated entity’s assets;

statements of actuarial opinion;

the issuer’s quarterly report (if any);

issuance documents for individual issues of the rated entity’s securities (if any);

internal documents defining the rated entity’s development plan, including the financial

outlook;

http://www.acra-ratings.ru/

http://www.acra-ratings.ru/



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internal documents setting internal control rules and framework, including the actuarial

function;

public sources (mass media);

data obtained during a rating meeting with the representatives of the rated entity;

other data that are, in the Agency’s opinion, material for the purposes of rating analysis.

In the absence of information sufficient to apply the methodology, ACRA refrains from

assigning a credit rating. If ACRA identifies that there are no sufficient information sources to

maintain the existing credit rating, ACRA withdraws the credit rating, with no further action

taken in respect of that rating. Information about the actions taken is reflected in a publication

about the rating action in respect of the rated entity.

Sufficiency of information is determined by the possibility to conduct rating analysis in

accordance with the general principles of ACRA’s rating process. The main criteria of

information sufficiency include:

the possibility is provided to perform quantitative and qualitative analysis of the financial

and business activities of the rated entity;

the possibility is provided to analyze external and internal risk factors able to affect the

creditworthiness of the rated entity;

the possibility is provided for a comparative analysis against comparable entities to

which ratings are assigned.

3 Short Overview of the Rating Analysis Structure

Rating assessment is based on combining the standalone creditworthiness assessment (SCA)

score with additional external factors, generally beyond control of the organization.

The standalone creditworthiness assessment score of the rated entity is determined on the

basis of the following key factors:

business profile assessment score reflecting the quality of the external environment,

market position, operating metrics;

financial profile assessment score reflecting capital adequacy, liquidity, and the quality

of assets;

management profile assessment score (management quality assessment score)

reflecting the assessment of strategy and management and the quality of processes,

including risk management and corporate governance.

In certain cases, other factors or special situations affecting creditworthiness may exist besides

the characteristics mentioned above. In such a case, the Agency may make additional

adjustments to the SCA score.

Applying additional adjustments. In most cases, the rating of an insurance organization

before taking into account external support is no different from the standalone

creditworthiness assessment score. At the same time, ACRA admits that certain instances exist

where there are factors not accounted for in any of the rating components (cases of operational



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transformation, a significantly better financial profile compared to the peer group, specifics of

the region, etc.). In cases like that, the SCA score is to be adjusted further to a decision of the

rating committee. The Agency’s approach to adjustments is described in more detail in the

Additional Adjustments section.

Taking into account external support. Depending on the rated entity’s ownership structure,

the Agency may decide to add additional notches to / subtract additional notches from the

SCA score to account for the presence/absence of support from the group or the government.

The Agency’s approach to accounting for external support is described in more detail in the

relevant methodologies (Methodology for Analyzing Relationship Between Companies within

a Group, Methodology for Analyzing Relationship between Rated Entities and the Government,

and Methodology for Analyzing Relationship between Rated Entities and Supporting

Organizations outside the Russian Federation).

Determining the final rating. In the absence of external support factors, the final credit rating

of the rated entity on the national scale will be the SCA level, as adjusted. If there are support

factors in place, the final rating is determined based on the SCA, as adjusted for support from

the group or the government.

The dependence of the final rating on external support factors is shown in Figure 1:

Figure 1. Rating analysis structure

Source: ACRA

Business profile Financial profile Management

profile

Additional

adjustments

External support

Standalone creditworthiness

assessment

Credit rating



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4 Determining the Standalone Creditworthiness Assessment

Score

The SCA score is formed in accordance with Table 1 to an accuracy of a rating category, based

on a quantitative measure—the final SCA score of the rated entity in points from 1 to 6

(hereinafter, the final assessment score).

If the final assessment score is close to a boundary between two of the ranges specified in

Table 1, the range is chosen taking into account ACRA’s expectations about the score’s

dynamics on a horizon of 12 to 18 months.

A similar approach is used for other metrics (scores) in the methodology.

Table 1. Standalone creditworthiness assessment

Rating category Final assessment score in points

aaa–aa 1–2

A 2–3

Bbb 3–4

Bb 4–5

b–c 5–6

Source: ACRA

The SCA score within a rating category (using the + and − modifiers) is determined, and the

highest (aaa) category or a category with a high relative probability of default (ссс, сс, с) is

assigned depending on:

how close the final assessment score is to range boundaries in Table 1;

what are the trends of change for the factors determining the creditworthiness of the

organization;

how the metrics and qualitative characteristics of the organization compare to similar

metrics of other organizations within the same or neighboring rating categories.

The final decision on the SCA score is made by the Agency taking into account the analysts’

opinion on whether the methodology is fully or partly applicable to a specific rated entity.

To come to the final assessment score, the Agency uses a step-by-step approach described

below.

The assessment scores for business characteristics are combined into an integral business

profile assessment score, and the assessment scores of the characteristics of the financial

condition are combined into an integral financial profile assessment score. Those factors (the

business profile and the financial profile) are assessed on a six-point scale, with 1 point being

the best score, and 6 points being the worst score. Taking into account the instances of

averaging and in-between situations, assessment scores may take on fractional values within

the interval of 1 to 6. Factor assessment scores represent combinations of the results of

qualitative and quantitative analyses conducted based on the rules described in the

methodology.



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For a typical organization steadily functioning in the market and having a stable financial

position, there should not be much divergence between the integral business profile

assessment score and the integral financial profile assessment score, as both assessment scores

result from strategy and managerial decisions of the management. ACRA reserves the right to

change the below weights of the boundaries in case of a material (more than one unit)

divergence between the integral business profile assessment score and the integral financial

profile assessment score.

The range of the final assessment score is determined based on the integral business profile

assessment score and the integral financial profile assessment score.

Example: If the integral business profile assessment score is equal to 3.6, and the integral financial

condition assessment score is equal to 4.1, then the final assessment score range will be from 3.6

(lower boundary) to 4.1 (upper boundary).

The quality of management is assessed on a five-point scale from 1 (high) to 5 (low). The

management quality assessment score determines the weights of the upper and the lower

boundaries of the final assessment score, and may also limit the final rating category.

Table 2. Assessment of management quality

Quality of management Upper boundary weight Lower boundary weight SCA limitation

(category)

High 0.5 0.5 -

Adequate 0.75 0.25 no higher than aa

Satisfactory 1 0 no higher than aa

Insufficient 1 0 no higher than bb

Low 1 0 no higher than b

Source: ACRA

Example: If the integral business profile assessment score is equal to 3.6, and the integral financial

profile assessment score is equal to 4.1, then, with an adequate quality of management, the final

assessment score will be

4.1 ∙ 0.75 + 3.6 ∙ 0.25 = 3.975,

which corresponds to the bbb category.

In case of a satisfactory or insufficient quality of management, the final assessment score will be

determined to be 4.1, which corresponds to the bb category.

In case of a low quality of management, the SCA category will be determined to be b.

4.1. Business Profile

The business profile assessment score is formed based on an analysis of such subfactors as:

quality of the external environment;

market position;

operating metrics.



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Each of the three subfactors is assessed on a six-point scale of 1 (best score) to 6 (worst score).

The integral assessment score for business characteristics is formed pursuant to Table 3, based

on the assessment scores for the market position and operating metrics.

Table 3. Business profile assessment

Operating metrics

assessment score (range)

Market position assessment score (range)

1–2 2–3 3–4 4–5 5–6

1–2 1–2 1–2 1–3 2–4 3–5

2–3 1–3 2–3 2–3 3–5 3–5

3–4 2–4 3–4 3–4 3–5 4–5

4–5 2–4 3–5 4–5 4–5 4–5

5–6 5–6 5–6 5–6 5–6 5–6

Source: ACRA

The Agency determines the business profile value within the above ranges based on expert

opinion, taking into account the assessment of the quality of the external environment,

proximity to boundaries, and benchmarking the organization’s characteristics against similar

metrics of other organizations.

4.1.1. Quality of the External Environment

The assessment of the quality of the external environment is based on an assessment of the

outlooks and risks of various types of insurance activities of a company, while adjustments are

applied to the level of regional concentration.

The individual segments of the insurance industry for the purposes of applying this

Methodology are presented in Table 4.

Table 4. Individual segments of the insurance industry

Segment Description according to the classification of insurance types in the statistical

tables of the Bank of Russia

Life insurance Life insurance, pension insurance

Accident insurance Accident and sickness insurance

Private health insurance Private health insurance

Motor hull insurance Insurance of land vehicles (except railway transport)

Corporate property

insurance

Insurance of other corporate property (does not include transport and cargo

insurance or agricultural insurance)

Individual property

insurance

Insurance of other individual property (does not include transport and cargo

insurance or agricultural insurance)

Third party liability

insurance

Mandatory civil liability insurance for vehicle owners

Other types of

insurance

Types of insurance that are not included in other segments

Sources: ACRA, Bank of Russia



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The assessment of the outlook and risks of insurance activity is the result of quantitative and

qualitative analysis, which is conducted for each segment separately. The quantitative analysis

factor is the growth rate of the corresponding insurance market segment (including in

comparison with the growth rate of the economy as a whole) according to Table 5.

Table 5. Assessment of the outlook and risks for insurance industry segments

Growth rates on insurance premiums by segment Base assessment of outlook and risks

by insurance industry segment

The growth rate of insurance premiums significantly exceeds the

growth rate of the economy 1

The growth rate of insurance premiums generally corresponds with

the growth rate of the economy 3

The growth rate of insurance premiums is significantly lower than

the growth rate of the economy 5

Source: ACRA

Insurance premium growth rates by insurance industry segment and region are calculated

based on the statistical data of the Bank of Russia.

Qualitative analysis is based on the available information about various interrelated external

factors affecting the activities of the organization, including, but not limited to, the following:

quality of regulation and self-regulation of the insurance industry;

actions of the regulator with respect to the insurance market players as well as expected

actions;

judicial practice in relation to insurance market players;

the level of loss and price competition in the insurance market segment;

bankruptcies of market players;

mass media reports on the insurance market.

If ACRA believes that factors have an important effect on the creditworthiness of the insurance

organization, the Agency reserves the right to adjust the assessment of the outlook and risks

of the insurance market segment within two notches from the base assessment.

The assessment of the quality of the external environment of an insurance company is

calculated as an average weighted assessment of the outlook and risks of the segments of the

insurance market in which this organization operates.

If there is a regional concentration (more than 50% of total insurance fees falls on one region

or a limited number of regions), the Agency can apply an expert adjustment that changes the

initial assessment of the quality of the external environment. The indicator can be adjusted up

or down by no more than 2 points, while the adjusted assessment cannot exceed 6 points or

be less than 1 point.

The risks of a high regional concentration of the insurance business can be increased or

compensated depending on the economic situation of the region where the insurance

company operates. The economic situation of a region is assessed in accordance with the

principles set out in the Methodology for Credit Ratings Assignment to Regional and Municipal

Authorities of the Russian Federation.



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4.1.2. Market Position

The assessment score for the organization’s market position is formed taking into account such

metrics as:

diversification of the customer base;

quality of the product range;

diversification of sales channels;

market share;

customer loyalty, reputation, and brand.

ACRA considers the first two metrics as more or less equivalent in significance and, to a certain

degree, mutually compensating. Diversification of sales channels is an adjusting metric. Market

share is an additional metric that can have a positive effect on the assessment of the market

position.

Table 6. Preliminary market position assessment

Assessment

range Weight Adjustment Weight

Diversification of the customer base 1–6 0.5

Quality of the product range 1–6 0.5

Interim result 1–6

Diversification of sales channels 1–3 ±0.5

Interim result 1–6 0.5–1.0

Market share 1 0.5–0.0

Preliminary market position assessment 1–6

Source: ACRA

The amount of adjustment is directly dependent on the assessment score for the metric of

diversification of sales channels:

for a score of 1, the adjustment will be −0.5;

for a score of 2, the adjustment will be 0;

for a score of 3, the adjustment will be +0.5.

Customer loyalty, reputation, and brand are considered as a qualitative metric determining the

boundary of the assessment score for the market position and affecting the final SCA score and

the final rating.

Table 7. Limitation on the final assessment score for the market position and SCA score

Assessment score for

customer loyalty,

reputation, and brand

Range of the final

assessment score for the

market position

SCA score

limitation Effect on the final rating

Positive - -

A positive factor when

determining the final rating

within a rating category.

Neutral - - -

Negative 4–6 No higher

than bbb+ -

Source: ACRA



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Example: If the assessment score for customer base diversification is 3, and the assessment score

for product range quality is 4, then the interim result in respect of the preliminary assessment

score for the market position will be

3 ∙ 0.5 + 4 ∙ 0.5 = 3.5.

Further, if the assessment score for the diversification of sales channels is equal to 1, we apply an

adjustment:

3.5 − 0.5 = 3.

Further, if market share weight is 0.3, the preliminary assessment score for the market position

will be

3 ∙ 0.7 + 1 ∙ 0.3 = 2.4.

If customer loyalty, reputation, and brand are assessed positively or neutrally, this assessment

score will be final. If customer loyalty, reputation, and brand are assessed negatively, the final

assessment score for the market position will be set to 4, taking into account the boundaries of

the range specified in Table 7.

Holding an important market share is a substantial positive factor showing the stability of the

organization. Besides access to the customer base, holding an important market share enables

an organization to influence the development of standards and other rules in the market

segment in question, which reduces its exposure to business risks.

The effect of the Market Share metric on the assessment of the organization’s market position

is determined by the weight of the metric. The bigger the organization’s market share, the

greater the weight of this metric. An insignificant market share has no effect on the assessment

of the market position.

Table 8. Weight of the Market Share metric

Aggregate market share Share in the life insurance

segment Share in other segments Weight

More than 10% More than 10% - 0.5

1%–10% 1%–10% More than 10% 0.3

Less than 1%, part of the Top 20 Less than 1%, part of the Top 10 1%–10% 0.1

Less than 1%, outside of the Top

20

Less than 1%, outside of the Top

10 Less than 1% 0

Source: ACRA

The degree of diversification of the customer base determines the stability of the organization’s

business in face of a risk of certain customers or customer groups withdrawing from dealing

with the organization, and concentration of the customers’ insurance risks by geography and

industry.

To assess the diversification of the customer base, ACRA takes into account the dependence of

the insurance portfolio on the following customer categories:

large customers, each of whose respective shares in the insurance premium exceeds 2%

(a group of interdependent customers is considered as one customer);

retail customers—individuals and small businesses;

corporate customers—legal entities not falling in the other categories.



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The insurance portfolio is understood to mean the aggregate of insurance risks assumed by

the organization. In calculation of absolute and relative metrics of the insurance portfolio, the

Agency may take into account insurance premiums, insurance reserves, or the number of

insured risks or assets on a gross or net basis depending on the specific situation. The term

“gross” hereinafter means “without excluding reinsurers’ share,” and the term “net” means

“after excluding the reinsurer’s share.”

To assess the diversification of the customer base, retail customers are grouped by region and

corporate customers, by economy industries.

Diversification of the customer base is assessed from 1 (best score) to 6 (worst score) in

accordance with Table 9.

Table 9. Assessment of the diversification of the customer base

Hclient, a modified Herfindahl–Hirschman

index

Assessment score for the diversification of the customer

base

0–250 1

250–500 2

500–1000 3

1000–2000 4

2000–4000 5

More than 4000 6

Source: ACRA

The Hclient modified Herfindahl–Hirschman index is calculated with the following formula:

𝐻𝑐𝑙𝑖𝑒𝑛𝑡 = ∑ 𝑎𝑖𝑤𝑖2

𝑖

where:

i is the index of a large customer or a group of retail/corporate customers;

wi is the percentage of the insurance premium for a large customer or a group of

retail/corporate customers within the aggregate sum of insurance premiums;

ai is a ratio equal to 1 for large customers and 0.5, for retail/corporate customer groups.

The ai ratio for large customers may be lowered to 0.5 in case of a considerable diversification

of that customer’s insurance risks by geography and industry and/or if any circumstances exist

that reduce the risk of the customer’s withdrawal from dealing with the organization.

The degree of diversification of the customer base determines the stability of the organization’s

business in face of the risks of failure or disruption of some of the channels the organization

uses to sell its products.

To assess the diversification, ACRA defines the following categories of sales channels:

controlled sales channels means direct sales, related agents (i.e. agents within the

common group with the organization, directly employed agents, and agents selling the

organization’s products on an exclusivity basis), internet sales;

independent sales channels means all other sales channels.



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In each of the above categories, the Agency identifies singular sales channels through each of

which more than 2% of the total volume of the organization’s services are sold (large sales

channels). Singular sales channels are understood to mean separate agents or other kinds of

intermediaries engaged in sales of insurance products. All other sales channels are grouped by

type (individual agents, brokers, car dealers, etc.), with division into controlled and independent

channels.

Diversification of sales channels is assessed from 1 (best score) to 3 (worst score) in accordance

with Table 10.

Table 10. Assessment of the diversification of sales channels

Hchannel, a modified Herfindahl–Hirschman

index

Assessment score for the diversification of sales

channels

0–1000 1

1000–5000 2

More than 5000 3

Source: ACRA

The Hchannel modified Herfindahl–Hirschman index is calculated with the following formula:

𝐻𝑐ℎ𝑎𝑛𝑛𝑒𝑙 = ∑ 𝑎𝑖𝑤𝑖2

𝑖

where:

i is the index of a singular sales channel or a group of sales channels;

wi is the percentage of the insurance premium for a singular sales channel or a group of sales

channels within the aggregate sum of the organization’s insurance premiums;

ai is a ratio equal to 1 for independent singular sales channels, 0.5, for independent groups of

sales channels and controlled singular sales channels, and 0.25, for controlled groups of sales

channels. If any circumstances exist (including in connection with legislative requirements)

suggesting that the reliability of a certain channel differs from the reliability of other channels

falling into the same group, ACRA may set a different value for the ai ratio, within a range of 0

to 1.

Product range quality presumes the completeness and relevance of the organization’s offerings

for its customers, availability of unique products or options, differentiating the organization’s

services from those offered by competitors.

When assessing product range quality, ACRA analyzes sales structure by type of insurance in

comparison to market data. A positive attribute is the organization’s presence in the majority

of important segments typical of the customer base. In this context, the Agency takes into

account that the completeness of the product range should match the customer base, that is

the absence of products that are not in demand with the organization’s customers is not a

negative sign. In addition, the Agency takes into account the availability of unique products or

options that are in demand with the customers. If such products or options exist, their relevance



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can be confirmed with corresponding growth rates. A high concentration around one or several

interrelated products (e.g., comprehensive car insurance and compulsory civil liability car

insurance) is a negative characteristic for an organization.

The Agency determines the final product range assessment score taking into account the

results of benchmarking against a peer group, within a range of 1 (best score) to 6 (worst score).

The integral assessment score for customer loyalty, reputation, and brand can be Positive,

Neutral, or Negative. Each of the above components is a subfactor of the integral assessment

score. The Agency comes to subfactor assessment score based on a qualitative analysis in

comparison to competitors.

In assessing customer loyalty, the Agency takes into consideration organizations’ factual data

on customer base management over the last three years. In particular, the Agency analyzes the

metrics of renewed insurance contracts and cross-selling metrics. ACRA may also take into

account the results of customer satisfaction surveys and customer reviews on dedicated

Internet sites. As such kind of data may be subjective and often fragmentary in nature, the

customer loyalty subfactor will in most cases receive an assessment score of Neutral. The

assessment scores of Positive and Negative presume that clear signs exist for a better or a

worse position compared to competitors. At the same time, a total absence of information

about customer loyalty may negatively affect the assessment score for the quality of

management.

To assess reputation, ACRA takes into consideration the transparency of the ownership

structure and information from mass media on the organization, its management team, and

owners. Any encumbrance over shareholdings/stakeholdings in the organization that might

entail forced changes in its ownership structure is also taken into account. If no information

about ultimate beneficiaries is available, reputation receives an assessment score of Negative.

The assessment score for the brand is formed based on data about the organization’s presence

in the media space, including the Internet. In particular, ACRA takes into account information

about brand awareness, the organization’s internet site traffic and mass media citation rate. In

this context, neutral media mentions for the organization are considered as a positive sign in

assessing the brand. The Agency may also take into account the share of new customers in the

insurance portfolio.

ACRA comes to an integral assessment score for customer loyalty, reputation, and brand on

the basis of assessment scores for these subfactors, taking into account their importance. For

these purposes, a Negative assessment score for any of the subfactors means that the integral

assessment score cannot be Positive.

4.1.3. Operating Metrics

The assessment score for operating metrics is formed based on data on growth rates and

efficiency of the organization.

For the purposes of forming the assessment score, a four-level gradation is introduced to assess

operational efficiency and a three-level gradation, to assess growth rates. The assessment score

for operating metrics is assessed in points from 1 (best score) to 6 (worst score) in increments

of 0.5 in accordance with Table 11.



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Table 11. Operating metrics assessment

Operational efficiency

Growth rates

Above the market On par with the

market Below the market

High 1 1–2 2–3

Comfortable 1–2 2–3 3–4

Adequate 2–3 3–4 4–5

Insufficient 4–6 5–6 6

Source: ACRA

The organization’s growth rate is understood to mean the annual growth rate for the insurance

premium. From the perspective of assessing the business profile, high growth rates (while

maintaining sufficient operating efficiency) are a positive indicator showing that the

organization has chosen the right business model. The pressure of growth rates on solvency

and capital adequacy is accounted for in another rating component, the financial profile

characteristic.

ACRA takes into consideration both actual and forecast growth rate values for the organization;

this section of the methodology, however, focuses on assessing forecast values. The assessment

scores of Above market, On par with the market, and Below the market express ACRA’s opinion

on whether the organization is able to be ahead of the average market growth rates. When

determining the assessment score, the Agency takes into account the quality of the expected

growth. In particular, ACRA takes into consideration:

the current market share of the organization;

the nature of the organization’s growth: whether it is organic or via mergers and

acquisitions, or purchases of insurance portfolios;

conformity of growth to the target structure of the insurance portfolio as defined by the

organization’s strategy;

presence of signs of dumping.

For example, for an organization holding a large market share, a growth rate surpassing market

growth will be registered based on lower metrics. If the organization has withdrawn from

certain insurance market segments because of strategic considerations, growth rate

comparison will take place for the segments it considers to be its priorities.

In assessing the organization’s operational efficiency rate (similarly to assessing growth rates),

it is the forecast rate, rather than the historical rate, that is of interest. Hence it is necessary to

take into account possible factors of change in efficiency compared to the actual rate in the

last year. Factors able to cause changes in the efficiency assessment score include:

trends of change in the structure of the insurance portfolio;

trends of change in loss-making and expenses broken down by insurance portfolio

segment, and their volatility;

changes in the legislation and/or economic situation;

strategy and measures taken by the organization’s leadership;

budget planning metrics.



Page | 17

The operational efficiency rate is assessed separately for the life insurance segment and the

non-life insurance segment. A combined ratio is taken as an efficiency metric for the non-life

insurance segment:

𝐶𝑜𝑚𝑏𝑖𝑛𝑒𝑑 𝑟𝑎𝑡𝑖𝑜 ==𝑁𝑒𝑡 𝑐𝑙𝑎𝑖𝑚𝑠 𝑖𝑛𝑐𝑢𝑟𝑟𝑒𝑑 + 𝑁𝑒𝑡 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠

𝑁𝑒𝑡 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑒𝑎𝑟𝑛𝑒𝑑

The operational efficiency rate is assessed in comparison to competitors (taking into account

both actual and forecast values).

Table 12. Assessment of the operational efficiency rate using a forecast combined ratio

Forecast efficiency Assessment

score

The forecast combined ratio is insufficient to obtain a positive financial result taking into

account investment revenue from reserve funds. Insufficient

The forecast combined ratio is

sufficient to obtain a positive

financial result taking into

account investment revenue

from reserve funds.

The organization is within the worst 25% of organizations

based on the combined ratio. Adequate

The organization is within the 25%–75% range of

organizations based on the combined ratio. Comfortable

The organization is within the best 25% of organizations

based on the combined ratio. High

Source: ACRA

When assessing investment revenues from reserve funds in order to determine the sufficiency

of the combined ratio, the rate of return is considered to be equal to the yield on government

bonds. Investment revenue from reserve funds is understood to mean the potential (model)

amount of revenue from investing the corresponding sum of funds in financial instruments with

the specified yield. ACRA assesses the investment revenue based on expert opinion.

When determining the ranges, the Agency uses information about organizations whose

aggregate insurance premium for non-life insurance is no less than 60% of the total market

size. In this context, the weight of an organization in the sample is equal to its share in the

insurance premium of the organizations under consideration.

If the value of net premium earned is lower compared to other metrics used in calculating the

combined ratio, the above formula may produce inadequate values. In such case, ACRA make

a decision to assess efficiency on the basis of analyzing other performance metrics of the

organization.

The metric of return on assets is used as an efficiency metric for the life insurance segment:

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑎𝑠𝑠𝑒𝑡𝑠 =

=𝑁𝑒𝑡 𝑖𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 𝑝𝑟𝑒𝑚𝑖𝑢𝑚𝑠 − 𝑁𝑒𝑡 𝑝𝑎𝑦𝑜𝑢𝑡𝑠 − 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑛𝑒𝑡 𝑖𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 𝑟𝑒𝑠𝑒𝑟𝑣𝑒𝑠

𝑆𝑢𝑚 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠

−𝑁𝑒𝑡 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠

𝑆𝑢𝑚 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠+

𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑟𝑒𝑣𝑒𝑛𝑢𝑒


The amount of assets is calculated as the period-average value of assets related to the life

insurance business. Assets related to life insurance are understood to mean:



Page | 18

all assets of an organization primarily engaged in life insurance;

within the structure of a composite insurance organization, the assets of the subsidiary

or subdivision, primarily engaged in life insurance.

The efficiency rate is assessed in comparison to competitors.

Table 13. Assessment of the operational efficiency rate using forecast return on assets

Forecast efficiency Assessment

score

Forecast return on assets below zero Insufficient

Forecast return on assets

above zero.

The organization is within the worst 25% of organizations

based on return on assets. Adequate

The organization is within the 25%–75% range of

organizations based on return on assets. Comfortable

The organization is within the best 25% of organizations

based on return on assets. High

Source: ACRA

When determining the ranges, the Agency uses information about organizations whose

aggregate insurance premium in the life insurance segment is no less than 60% of the total

market size. In this context, the weight of an organization in the sample is equal to its share in

life insurance premiums of the organizations under consideration.

For organizations engaged in both life insurance and non-life insurance, the assessment score

for operating metrics is the average weighted assessment score for operating metrics based

on the forecast insurance premium volumes over the upcoming three years.

4.2. Financial Profile Assessment

The financial profile assessment score of an organization is formed based on an analysis of

such subfactors as:

capital adequacy;

quality of assets;

liquidity.

Contrary to business profile characteristics, all financial profile components are mutually

limiting, i.e. they have no compensating effect on each other. For example, an organization with

sufficient capitalization level and low liquidity must be assessed on its liquidity.

By the same token, low quality of assets will limit both capital adequacy and liquidity regardless

of the calculated values of these subfactors.

Thus, the integral assessment score of the financial profile of an organization is generally

equal to, or determined to a significant extent by, the worst of the three assessment

scores: capital adequacy assessment score, asset quality assessment score, and liquidity

assessment score.

The liabilities of the insurance organization are analyzed as part of assessing capital adequacy

and liquidity.



Page | 19

ACRA additionally takes into consideration a complex characteristic of the quality of financial

policy, which encompasses diverse aspects of financial management, including:

financing of mergers and acquisitions;

financing of investment projects;

borrowing policy;

providing guarantees and suretyships;

using derivative financial instruments, etc.

An aggressive financial policy, involving, in particular, an active use of borrowings to finance

capital market deals or investment projects, especially in industries unrelated to insurance, may

result in an adverse adjustment to the financial profile assessment score. When assessing

financial policy, the organization’s credit history is taken into account. Special attention is paid

to events of violation of obligations under debt instruments (bonds) and bank loans. If the

rated entity contacted its creditors for a forced debt restructuring, it negatively affects the

assessment by the Agency of the organization’s credit history.

4.2.1. Capital Adequacy Assessment

The assessment of capital adequacy necessarily involves an analysis of such metrics as:

compliance with regulatory requirements;

absolute size of capital;

relationship between the capital size and risk;

access to sources of capital;

leverage ratio.

Access to capital sources is of great importance for organizations with a relatively small

capitalization, so the effect of this metric depends on the relationship between capital and risk.

To account for this circumstance, the relationship between capital and risk and the assessment

score for access to sources of capital are consolidated into a single combined ratio.

A preliminary assessment score for capital adequacy is determined in points from 1 (best score)

to 6 (worst score) and represents the average weighted adequacy score for the above metrics

(excluding the metric of compliance with regulatory requirements).

Table 14. Preliminary assessment of capital adequacy

Assessment range Weight

Absolute size of capital 1–6 0.2

Relationship between capital and risk and access to

sources of capital 1–6 0.8

Preliminary assessment of capital adequacy 1–6

Source: ACRA



Page | 20

The final assessment score for capital adequacy is set at the level of the preliminary assessment

score, taking into account the limitation imposed by the assessment score for compliance with

regulatory requirements and the value of the financial leverage.

Compliance with regulatory requirements regarding capital and solvency is checked based on

the financial forecast for the organization’s business. The assessment score for this metric

defines the lower boundary for the overall capital adequacy assessment score. The assessment

score for compliance with regulatory requirements may take values according to Table 15.

Table 15. Assessment of compliance with regulatory requirements

Assessment score for

compliance with regulatory

requirements

Description

Range for the final

assessment score for

capital adequacy

Low risk Violation of regulatory requirements in the

upcoming three years is unlikely. 1–6

Moderate risk Violation of regulatory requirements is

possible by the end of a three-year period. 3–6

High risk Violation of regulatory requirements is

possible during the upcoming year. 5–6

Maximum risk

Regulatory requirements have actually been

violated or will inevitably be violated during

the upcoming year.

6

Source: ACRA

To assess leverage and the relationship between capital and risk, ACRA uses the metric of

available capital. Available capital is defined as the organization’s funds that may be used to

cover unforeseen losses. Available capital is calculated on the basis of an IFRS assessment of

shareholders’ equity as at the last reporting date, subject to adjustments:

𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 =

= 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠’ 𝑒𝑞𝑢𝑖𝑡𝑦 − 𝐺𝑜𝑜𝑑𝑤𝑖𝑙𝑙 − 𝑂𝑡ℎ𝑒𝑟 𝑖𝑛𝑡𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡𝑠

− 𝐷𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑎𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛 − 𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝑠𝑖𝑧𝑒 𝑜𝑓 𝑐ℎ𝑎𝑟𝑡𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

± 𝑂𝑡ℎ𝑒𝑟 𝑎𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡𝑠

The minimum amount of charter capital is determined in accordance with the requirements of

the legislation.

Goodwill and other intangible assets are excluded from available capital being assets that most

likely may not be used to compensate for the organization’s unforeseen losses. ACRA may

decide to exclude deferred acquisition costs only partially, if the organization’s insurance

portfolio would generate sufficient operating revenue even under an adverse scenario. Other

adjustments may include:

changes in the assessment of assets and liabilities introduced by decision of the Agency;

taking into account subordinated debt and hybrid capital;

agreements for the provision of support from shareholders.

The leverage ratio is calculated as the relationship between available capital and the aggregate

volume of assets plus off-balance sheet credit-related liabilities. Available capital is not

decreased by the minimum amount of the charter capital for the calculation of the leverage



Page | 21

ratio. Credit-related off-balance sheet liabilities include, in most cases, the amounts of

guarantees and suretyships provided, and obligations under derivative financial instruments

(e.g., options). The following logic applies when including the amount of off-balance sheet

liabilities: if the organization is unable to terminate the effectiveness of an instrument, it is

included in calculation in full (100%); if, however, the organization has the right to withdraw

unilaterally from performance on the claim, such claims are included in calculation at 10% of

the amount specified in the reporting statements. For calculation of the leverage ratio, the sums

of assets and off-balance sheet liabilities are adjusted in conformity with the adjustments made

when calculating available capital.

The value of leverage ratio below 4% limits the assessment score for capital adequacy to a

range of 5 to 6 points.

Absolute capital size is of importance for rating, as the size of certain external environment

risks is identical for all organizations regardless of the size of their business. In addition, larger

insurers have more opportunities to diversify their activities.

The lower boundary of the absolute size of capital is set by the requirements of the legislation.

The absolute size of capital in points (i.e., the assessment score for the subfactor) is assessed

from 1 (best score) to 6 (worst score) in accordance with the scale presented in Table 16.

Table 16. Assessment of the absolute size of capital

Ratio of capital to minimum size of charter capital Assessment score

More than 10 1

6–10 2

3–6 3

2–3 4

1–2 5

Less than 1 6

Source: ACRA

The assessment score for the combined metric of the ratio of capital to risk and access to

sources of capital is formed in points from 1 (best score) to 6 (worst score) in accordance with

the Table below.

Table 17. Assessment of the combined metric of the ratio of capital to risk and access to sources of

capital

Relationship between capital and

risk

Access to sources of capital

Constant Partial Limited

1 1 1 1

2 2 2 2

3 2 3 3

4 3 3 4

5 3 4 5

6 4 5 6

Source: ACRA



Page | 22

Limited access to sources of capital has no effect on the assessment. Partial access allows to

improve the assessment score by one notch for organization with a relatively low capitalization.

Constant access to sources of capital allows to raise the assessment score by up to two notches

depending on capitalization.

Wide opportunities to raise capital are a positive factor for an organization. It is necessary to

remember, however, that such opportunities, available under normal circumstances, may

reduce significantly during large-scale crises, when they are needed the most. Hence, for an

assessment of the availability of external capital, it is necessary to take into consideration the

exposure of a source of capital to the same risks as the organization. Accordingly, diversification

of sources of capital by investors’ jurisdiction (local vs international ones) is perceived as a

positive factor.

Access to sources of capital depends on such subfactors as:

the organization’s ability to general profits steadily exceeding the cost of capital (to

assess the cost of capital, ACRA may use standard approaches from the theory of

financial management);

ability of the existing shareholders and strategic partners to provide sufficient support

to the organization and the practices of providing such support;

presence of strategic investors with a strong business reputation in the ownership

structure;

possibility to offer securities in the open market;

existence of large investors’ interest for the organization and/or the insurance market as

a whole.

The assessment score for capital availability represents a subjective opinion of the rating

analyst. A positive interpretation of three or more subfactors will generally mean constant

access to sources of capital, two subfactors, partial access, and less than two subfactors, limited

access.

To determine whether capital corresponds to risk, ACRA assesses the relationship between

available capital and capital and risk (CaR).

Capital at risk is assessed as the maximum loss upon simultaneous materialization of any two

of the below stress scenarios. In this context, the loss is calculated taking into account possible

effect of scenarios on each other. The presented scenarios, and the ways of applying them to

the organization’s financial models represent expert assumptions of the Agency.

Scenario 1. Growth of the loss ratio of the insurance portfolio (non-life insurance) by one

standard deviation compared to the level expected during the next year. The expected

level is determined based on the organization’s financial forecast that may be adjusted by the

Agency, if necessary. The standard deviation is determined based on data for the last five years.

Following a material change in the structure of the insurance portfolio, ACRA runs an analysis

by separate segment (growth of the loss ratio by one standard deviation by each segment).

Recognizing a change in the structure of the insurance as a material change represents an

expert assumption of the Agency.



Page | 23

Scenario 2. Growth of loss reserves for non-life insurance by one standard deviation

compared to the expected level of revaluation of reserves. Revaluation is understood to

mean a retrospective change in valuation of reserves based on data about the actual

development of losses. Positive (negative) revaluation attests to an insufficient (excessive) initial

valuation of reserves. The expected level of revaluation and the standard deviation are

determined based on a retrospective analysis of loss reserves for the last five years. Following

a material change in the structure of the insurance portfolio, it is necessary to run an analysis

by separate segment (growth of loss reserves by one standard deviation by each segment).

Scenario 3. Maximum probable net retained loss as a result of a natural or technogenic

disaster. The Maximum probable net retained loss is understood to mean the biggest of the

hypothetical sums of insurance payouts for non-life insurance under various realistic scenarios

of disasters, less respective shares of reinsurers in payouts.

Scenario 4. Net retained life insurance loss in the amount of 0.15% of the total sum

insured for the risk of death. The total sum insured is calculated as the maximum sum of

immediate payouts upon the occurrence of death and the current value of cash flows of

deferred death payouts.

Scenario 5. Withdrawal from the performance of obligations by the largest (based on the

sum of the share in reserves and the receivables on the organization’s books) reinsurer

(a group of related reinsurers). If combined with scenarios 1–4, additional losses under

scenarios are taken into account.

Scenario 6. Bankruptcy of the largest debtor (a group of related debtors), except

reinsurers and organizations with a rating of AA−(RU) or higher.

Scenario 7. The maximum loss resulting from a combination of such events as:

Decrease in the value of shares of stock on the organization’s book by a percentage

equal to the annual standard deviation for stock index change (expressed in percent).

The standard deviation is assessed based on stock index data for the last five years.

Expert opinion, additionally substantiated by the analyst, may be used as an alternative

approach to model the decrease in the value of shares of stock.

Increase or decrease of the Central Bank’s key rate (to choose between two values: one

annual standard deviation or 50% of the Central Bank’s current key rate, whichever is

greater). The standard deviation is assessed based on data for the last five years. If the

standard deviation exceeds the current value of the key rate, the rate is equalized to

zero.

Growth or decline of the exchange rate of the national currency by one standard

deviation in one year. The standard deviation is assessed based on data for the last five

years. Calculation is carried out for all currencies in which the organization has material

assets and liabilities. It is presumed that growth or decline of the exchange rate of the

national currency takes place simultaneously with respect to all currencies. The Agency

is the one to recognize the assets and liabilities denominated in foreign currency to be

material. No account is taken of an indirect effect of currency revaluation on the

organization’s insurance reserves denominated in the national currency.



Page | 24

ACRA reserves the right to expand the expected volatility ranges of market metrics (but no

more than up to three times the historical standard deviation of the metric) within stress tests

conducted under Scenario 7, if necessitated by the current condition of the macroeconomic

environment. In this context, if a decision is made that it is desirable to conduct stress tests

with expanded expected volatility ranges for certain metrics, ACRA carries out a prospective

and retrospective analysis of possible associated changes in rating assessment scores assigned

in accordance with this methodology.

It is necessary to take into consideration the effect of the abovementioned changes on the

assets and liabilities of the organization, including insurance reserves.

The relationship between capital and risk in points (i.e. the assessment score for the metric for

the purposes of forming the capital adequacy assessment score) is determined in accordance

with Table 18.

Table 18. Assessment of the relationship between capital and risk

Ratio of available capital to capital at risk Assessment score

More than 2 1

1.5–2 2

1–1.5 3

0.75–1 4

0.5–0.75 5

Less than 0.5 6

Source: ACRA

4.2.2. Quality of Assets

To assess the quality of assets, it is necessary to take into account their compliance with the

regulatory requirements, their credit quality, structure, and concentration.

Compliance of the assets with regulatory requirements regarding structural relationships is

checked based on the financial forecast for the organization’s business. The assessment score

for this metric defines the admissible range for the overall assessment score for the quality of

assets. The assessment score for compliance with regulatory requirements may take values

according to Table 19.

Table 19. Assessment of compliance with regulatory requirements

Assessment of compliance

with regulatory

requirements

Description

Range for the final

assessment score for the

quality of assets

Low risk Violation of regulatory requirements in the

upcoming three years is unlikely. 1–6

Moderate risk Violation of regulatory requirements is

possible by the end of a three-year period. 3–6

High risk Violation of regulatory requirements is

possible during the upcoming year. 5–6

Maximum risk

Regulatory requirements have actually been

violated or will inevitably be violated during

the upcoming year.

6

Source: ACRA



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The above limitation excluded, the assessment score for the quality of assets is determined by

the assessment score for the structure of assets, as adjusted following an analysis of the

concentration of assets.

To assess the structure of assets, the Agency has identified the following asset classes:

Table 20. Asset classes

Asset class Risk index

1. Cash* and fixed-income instruments**

1.1. Rating of A(RU) or higher 1

1.2. Rating of ВВ+(RU) to A−(RU) 2

1.3. Rating of ВВ−(RU) to ВВ(RU) 3

1.4. Rating of В(RU) to В+(RU) 4

1.5. Rating of B−(RU) 5

1.6. Rating of CCC(RU) or lower 6

2. Other financial instruments (except those mentioned under 3, 4.2, and 4.3)

2.1. Listed 4

2.2. Unlisted 6

3. Uncovered derivatives and other leverage instruments Determined individually

4. Real estate (including land plots)

4.1. Company offices 3

4.2. Real estate for investment purposes (including via securities) 3–5

4.3. Investments in real estate projects (including via securities) 4–5

5. Share of reinsurers in reserves and premium deposits

5.1. Rating of A(RU) or higher 1

5.2. Rating of ВВ+(RU) to A−(RU) 2

5.3. Rating of ВВ−(RU) to ВВ(RU) 3

5.4. Rating of В(RU) to В+(RU) 4

5.5. Rating of B−(RU) 5

5.6. Rating of CCC(RU) or lower 6

6. Receivables under insurance and reinsurance contracts 2–6

7. Other assets Determined individually

* For cash in banks, the bank’s credit rating is taken into account.

** When determining the risk index for long-term debt instruments included in the trading portfolio of the

organization, ACRA may take into account expectations regarding the main economic trends.

Source: ACRA

The risk index specified in the table may be adjusted, if additional risk factors or risk-reducing

factors exist compared to typical cases.

All ratings mentioned above are ACRA’s credit ratings. If no information is available about the

rating of a counterparty (group of counterparties), the Agency analyzes available information

and assesses rating ranges based on expert opinion. The depth of analysis is proportional to

the importance of the asset in the balance sheet structure.

The quality of accounts receivable is established following an analysis of the following metrics

in comparison to competitors:

ratio of debt to the sum of premium earned;

sufficiency of provision for impairment;

concentration parameters by large debtors, etc.



Page | 26

A relatively high level of debt, low historical sufficiency of reserves for impairment, and a high

concentration around large debtors are negative assessment factors.

For further calculation, an average weighted risk index is determined. Shares of the above asset

classes within the total sum of assets are taken for weights. The assessment score for the

structure of assets is formed in points from 1 (best score) to 6 (worst score) based on the

relationship between capital and assets in accordance with the Table below.

Table 21. Assessment of the structure of assets

Capital/

assets

(range)

Average weighted risk index (range)

1–1.5 1.5–2 2–2.5 2.5–3 3–3.5 3.5–4 4–4.5 4.5–5 5–5.5 5.5–6

Less than

0.04

6 6 6 6 6 6 6 6 6 6

0.04–0.05 2.5–5.5 5–6 6 6 6 6 6 6 6 6

0.05–0.06 1.5–5 5–6 5.5–6 6 6 6 6 6 6 6

0.06–0.08 1–5 4–5.5 5–6 6 6 6 6 6 6 6

0.08–0.1 1–4 3–5 4.5–6 5.5–6 6 6 6 6 6 6

0.1–0.13 1–3 1.5–4.5 3.5–5.5 4.5–6 5.5–6 5.5–6 6 6 6 6

0.13–0.16 1–1.5 1–3.5 3–4.5 4–5.5 4.5–5.5 5–6 5.5–6 6 6 6

0.16–0.2 1 1–3 1,5–4 3–4.5 4–5 4.5–5.5 5–6 5.5–6 5.5–6 6

0.2–0.25 1 1–1.5 1–3 2–4 3–4.5 4–5 4.5–5.5 5–5.5 5–6 5.5–6

0.25–0.31 1 1 1–2 1–3 2–4 3–4.5 3.5–5 4–5 4.5–5.5 5–5.5

0.31–0.39 1 1 1 1–2 1–3 2–3.5 2.5–4 3.5–4.5 4–5 4–5

0.39–0.49 1 1 1 1 1–2 1–2.5 1.5–3.5 2.5–4 3–4 3.5–4.5

Source: ACRA

The Agency determines the assessment score for the quality of assets within the above ranges

taking into account proximity to boundaries and benchmarking the organization’s

characteristics against similar metrics of other organizations.

When assessing the Concentration of Assets subfactor, ACRA takes into consideration:

separate large concentrations whose value exceeds 2% of the sum of assets;

investments in debt and equity financial instruments and other obligations, including

obligations under reinsurance contracts or related parties’ projects;

investments in financial instruments and other obligations or projects in individual

sectors of economy.

A separate concentration is understood to mean:

the aggregate value of investments in financial instruments and other obligations,

including obligations under reinsurance contracts or projects of a group of related

parties’ (except investments in government securities of the Russian Federation,

including securities with a government guarantee);

the summed value of real estate assets / shares in real estate assets in the same location

(in immediate proximity to each other), including assets being constructed and

developed.



Page | 27

Following the analysis, the Agency comes to an opinion on whether there is additional in

connection with an increased concentration of assets. ACRA generally records the presence of

additional risk, if any of the following conditions are met:

the summed value of a single largest concentration / ten largest separate concentrations

exceeds 15% / 40% of the sum of assets;

the summed value of investments in financial instruments and other obligations,

including obligations under reinsurance contracts or related parties’ projects exceeds

25% of the sum of own funds;

the summed value of investments in financial instruments and other obligations or

projects in an individual sector of economy exceeds 70% of the sum of own funds.

Additional analysis factors include risk indexes and the nature of economy industries

corresponding to the assets that form concentrations. In this context, a high risk index for the

such assets corresponds to a high additional risk in connection with an increased concentration.

A high share of cyclical economy industries is also a factor increasing the assessment score for

risk.

Following an analysis of concentration of assets, the assessment score for the quality of assets

may be increased (worsened) by up to two notches.

4.2.3. Liquidity

Liquidity is determined by the organization’s ability to comply timely with the assumed financial

liabilities. In the context of this methodology, financial liabilities are understood to means

liabilities involving a mandatory or potential payout of cash including current and deferred tax

liabilities and the unearned premium reserve.

Liquidity analysis starts with determining the temporal structure of liabilities and assets. For an

insurance organization, the timing of insurance payouts depends on the time of occurrence of

insured events and the time frames of making and resolving claims. If sufficient statistical data

are available, it is possible to establish the expected time frames of future payouts.

ACRA considers the short-term and the long-term aspects of liquidity. In the short-term aspect,

ACRA assess the ability of the organization to comply timely with financial liabilities with a

maturity of up to one year. In the long-term aspect, the Agency takes into consideration

financial liabilities with any maturity.

ACRA identifies current liquidity as Weak, Adequate, or Strong depending on the value of the

current liquidity ratio (Clr).

Table 22. Current liquidity assessment

Current liquidity ratio Current liquidity assessment score

More than 1.3 Strong

1.1–1.3 Adequate

Less than 1.1 Weak

Source: ACRA



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The following formula is used for calculation:

Clr =LAcl + CrFcl

CLiab

where:

LAcl is the calculated amount of liquid assets for assessment of current liquidity;

CrFcl is the calculated amount of credit facilities established to cover temporary liquidity gaps,

used for assessment of current liquidity;

CLiab is the size of current financial liabilities, that is financial liabilities with a maturity of less

than one year.

In calculation of liquidity ratios, liquid assets are understood to mean the following asset

classes:

cash;

bank deposits;

bonds;

other fixed-income financial instruments;

listed shares of stock and other securities;

share of reinsurers in reserves and premium deposits;

receivables under insurance and reinsurance contracts.

In some cases, other assets may be included in liquid assets, if they possess necessary attributes.

For assessment of current liquidity, the volume of liquid assets is calculated as the sum by class

of liquid assets, adjusted taking into account a reduction coefficient. The values of reduction

coefficients are determined:

by possible mismatch between the maturities of liabilities and assets during the year,

including possible delays in receiving cash from counterparties other than provided by

contractual terms and provisions;

possible discounts upon sale of assets before their maturities or upon raising finance

backed by those assets;

possible default of the debtor when a relevant asset becomes due for repayment.

The values of reduction coefficients for assessment of current liquidity are specified in Table

23. Deviations from those values are admissible subject to substantiation.

Table 23. Reduction coefficients for assessment of current liquidity

Asset class Coefficient1

1. Cash and revocable deposits

1.1. With a maturity up to one year

1.1.1. Rating of ВВВ−(RU) or higher 1

1.1.2. Rating of ВВ+(RU) or lower or without rating 0.95

1.2. With a maturity of over one year

1.2.1. Rating of AA−(RU) or higher 1

1ACRA reserves the right to change the coefficient for each asset depending on its actual credit quality or the

presence of encumbrance.



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1.2.2. Rating of ВBВ−(RU) to A+(RU) 0.9


2. Irrevocable deposits and listed fixed-income financial instruments

2.1. With a maturity of up to one year

2.1.1. Russian Federation government debt 1

2.1.2. Rating of AA−(RU) or higher 1




2.2.1. Russian Federation government debt 0.9

2.2.2. Rating of AA−(RU) or higher 0.9



3. Other unlisted fixed-income financial instruments




3.1.3. Rating of ВВ+(RU) or lower or without rating 0.6 or lower




3.2.3. Rating of ВВ+(RU) or lower or without rating 0.1 or lower

4. Listed equity financial instruments (shares of stock, mutual funds, etc.) 0.4–0.7, depending on

liquidity

5. Receivables


5.1.1. Rating of AA(RU) or higher 0.8

5.1.2. Rating of ВВВ(RU) to AA(RU) 0.7

5.1.3. Rating of ВВ(RU) or lower or without rating 0.6

6. Share of reinsurers in reserves (other than the unearned premium reserve) and

premium deposits

6.1. Realization within one year




7. Other liquid assets 0

Source: ACRA

For assessment of current liquidity, the size of credit facilities is calculated as the sum of

undrawn credit facility balances, adjusted taking into account reduction coefficients depending

on the duration and terms and conditions of credit facilities. The values, and calculation

methods for individual values, of reduction coefficients are specified in Table 24.



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Table 24. Reduction coefficients for credit facilities

Coefficient

Irrevocable credit facility for a period of more than one year 1

Irrevocable credit facility for a period of more than one year Calculated depending on time to maturity

within the year.

Revocable credit facility 0

Credit facility depending on the rating. The threshold rating

is more than three notches below the current rating.

Calculated in the same way as for an

irrevocable credit facility.

Credit facility depending on the rating. The threshold rating

is by 1 to 3 notches lower than the current rating.

Calculated in the same way as for an

irrevocable credit facility with a coefficient of

0.5.

Source: ACRA

Reduction coefficients may be adjusted, if additional liquidity factors or liquidity-reducing

factors exist compared to typical cases.

When assessing short-term liquidity, ACRA may take into consideration the cash flows expected

within the upcoming year not accounted for as part of assets and liabilities. On sufficient

grounds, the current value of those cash flows may be taken into account in calculation of the

current liquidity ratio.

The size of current liabilities may depend on covenants specified in credit agreements. When

analyzing covenants, ACRA assesses the terms of their materialization and may decide to

recalculate the current liabilities.

ACRA identifies long-term liquidity as Strong, if the value of the long-term liquidity ratio (Ltlr)

is above 1.

The following formula is used for calculation:

Ltlr =LA

Liab

where:

LA is the fair value of liquid assets

Liab is the total size of financial liabilities

The concept of fair value of an asset is defined in the IFRS. ACRA comes to an opinion as to the

fair value of liquid assets based on IFRS reporting statements, valuers’ reports, calculations,

information about the results of sale procedures and other information. The Agency reserves

the right to adjust fair value estimates, subject to substantiation.

When calculating the total size of financial liabilities, deferred acquisition costs are excluded

from the unearned premium reserve. In addition, the size of the unearned premium reserve

may be adjusted, if the forecast combined ratio is significantly lower than 1.

If the long-term liquidity ratio is lower than 0.95, ACRA identifies long-term liquidity as

Adequate or Weak, depending on the assessment of whether it is possible for the organization

to improve its liquidity via:



Page | 31

the expected cash flow from operations;

sale of nonliquid assets;

raising extra capital.

Steady generation of free cash flow from operations is a positive factor both in terms of

receiving cash in future periods and in terms of an opportunity to raise extra capital.

The assessment score for liquidity as a subfactor in financial profile assessment is expressed in

points from 1 (best score) to 6 (worst score) in accordance with Table 25.

Table 25. Liquidity assessment

Current liquidity assessment Long-term liquidity assessment score

Strong Adequate Weak

Strong 1 2 3

Adequate 2 3 5

Weak 4 5 6

Source: ACRA

4.3. Assessment of Management Quality

The assessment score for the quality of management reflects the Agency’s opinion about that

factor and is expressed in points from 1 (best score) to 5 (worst score).

Table 26. Assessment of management quality

Quality of management Assessment score for management quality in

points

High 1

Adequate 2

Satisfactory 3

Insufficient 4

Low 5

Source: ACRA

The assessment score for the quality of management is composed of the assessment scores for

such subfactors as:

the management team’s experience and structure;

strategic vision and management;

actuarial function;

risk management;

corporate governance.

The assessment of each subfactor may be negative, neutral, or positive.

The rules set out below present information about the principles for assessment of the quality

of management, but are not absolute, as the final decision is made by the Agency, taking into

account the individual specifics of each organization.



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Table 27. Correspondence between subfactor assessment scores and the assessment score for the

management quality factor

Assessment score for management quality

in points

Positive assessment of four or more subfactors and no

negative assessments 1

Positive assessment of two or three subfactors and no

negative assessments 2

Neutral assessment of all subfactors 3

Positive assessment of one subfactor and no negative

assessments 3

Positive assessment of three or four subfactors and one

negative assessment 3

Positive assessment of one or two subfactors and one

negative assessment 4

Neutral assessment of four subfactors and one negative

assessment 5

Negative assessment of two or more subfactors 5

Source: ACRA

4.3.1. Experience and Structure of the Management Team

In the process of assessing the management team’s experience and structure, ACRA considers:

the experience and qualifications of the members of the organization’s governing

bodies, including in the positions they held earlier;

management structure, from the perspective of allocation of functions and zones of

accountability;

corporate culture, from the perspective of making business decisions;

the organization’s dependence on the key members of the management team.

The assessment of the subfactor may be positive, neutral, or negative. A positive assessment of

the subfactor corresponds to the following situation:

The members of the organization’s governing bodies possess sufficient experience and

qualifications, which is, on the whole, evidenced by their performance. The team is

sufficiently stable, but at the same time, the managers are not stuck in their positions.

A transparent management structure, with dedicated key functions and clear allocation

of zones of accountability. The management structure is not too hierarchical.

Key business decisions are made after a comprehensive discussion, but without wasting

time.

No critical dependence of the organization on individual key managers.

A negative assessment corresponds to the opposite situation. Intermediate and mixed

situations are assessed on a case-by-case basis.



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4.3.2. Strategic Vision and Management

In the process of assessing this subfactor, ACRA considers:

the quality of strategic planning and control;

the adequacy of strategy taking into account current and forecast conditions;

the results of implementation of strategic plans.



Strategic planning processes are sufficiently organized and formalized. Regular

reporting is in place on the results of implementation of strategic plans. Strategic

planning and control are paid close attention by the senior management of the

organization.

Strategy is, on the whole, in line with the current and forecast macroeconomic and

industry situation. Strategic objectives are reasonably ambitious. Strategy provides

sufficient maneuvering flexibility for unpredictable changes in external conditions;

strategic risks and the steps to mitigate them are defined completely enough.

The results of implementation of strategic plans, on the whole, show that the

management team is able to execute them successfully over the future periods.



4.3.3. Actuarial Function

In the process of assessing the actuarial function, ACRA considers:

the experience and qualifications of the organization’s actuaries, including external ones;

the distribution of the actuarial function across the organization and the actuaries’

independence;

the actuaries’ influence in decision-making;

the adequacy of methods for assessment of tariffs and reserves.



The organization’s actuaries possess sufficient experience and qualifications, and they

are sufficient in number.

The distribution of the actuarial function across the organization ensures and adequate

coverage of the necessary activities and provides actuaries with sufficient independence.

In particular, there is no or a fairly limited conflict of interest in connection with the

structure of employment remuneration for actuaries.

Actuaries have sufficient influence in making decisions about tariffs and the size of

reserves.



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The methods for assessment of tariffs and reserves are adequate, which is confirmed by

the results of a retrospective analysis.



4.3.4. Risk Management

In the process of assessing risk management, ACRA considers:

risk management principles and strategy adopted by the organization;

risk management organization, from the perspective of allocation of functions and zones

of accountability;

the quality of risk management processes;

experience and qualifications of risk managers.

independence of risk managers and their influence on decision-making;

compliance with global best practices in risk management, including compliance with

the Bank of Russia’s Methodological Guidelines for Ensuring the Continuity of Operations

of Noncredit Financial Organizations.



Risk management principles and strategy are in line with today’s practices. A risk

appetite statement has been adopted at the level of the board of directors. The

organization makes business decisions taking into account quantitative assessment of

risk.

The allocation of risk management functions and zones of accountability within the

organization ensures sufficient coverage of the necessary activities. The senior

management is involved in managing main risks at the level of the organization.

Risk management processes are sufficiently organized and formalized. Risk

management reports are provided on a regular basis and considered by the

management team and the board of directors.

Risk managers possess sufficient experience and necessary qualifications.

Risk managers are sufficiently independent and have an influence on decision-making.

Risk assessment methods are adequate and substantiated.



4.3.5. Corporate Governance

In the process of assessing this subfactor, ACRA considers:

the composition, and the experience and qualification of the members, of the board of

directors;



Page | 35

the quality of internal audit;

the organization’s activities aiming to restrict any conflict of interest.



The members of the board of directors possess sufficient experience and necessary

qualifications. The number of independent members of the board of directors is

sufficient to ensure that the interests of customers are protected from the influence of

the controlling shareholder.

Internal audit processes are sufficiently organized and formalized. Reports are produced

on a regular basis following internal audit reviews, and the recommendations of internal

auditors are applied in practice. Internal audit is paid close attention by the board of

directors. Internal audit is sufficiently independent from the executive governing bodies

of the organization.

Documented rules exist and are applied that are intended to exclude (or sufficiently

restrict) any conflict of interest.



4.4. Additional Adjustments

In most cases, the calculated SCA score is the starting point for the next rating analysis steps.

At the same time, ACRA admits that certain rare instances exist in which there are factors not

accounted for in any of the components of the rating (SCA score). In such case, the SCA score

will be adjusted by no more than two notches up or down by decision of the rating committee.

Positive adjustment factors (+2 notches to the SCA score) include the following situations:

The organization is undergoing the process of operational transformation (merger,

takeover of another company, change of shareholder, etc.), the results of which will

definitely increase its creditworthiness significantly.

The organization has a sustainable competitive advantage that is not reflected in the

SCA score and ensures a higher level of creditworthiness.

The organization steadily receives additional support from a shareholder or another

person. That support, however, cannot be assessed in accordance with the Methodology

for Analyzing Relationship Between Companies within a Group.

Negative adjustment factors (−2 notches from the SCA score) include the following situations:

The organization is undergoing the process of operational transformation (merger,

takeover of another company, change of shareholder, etc.), the results of which will

definitely decrease its creditworthiness significantly.

There is a high probability of potential regulatory or legal claims, the materialization of

which would significantly decrease the creditworthiness of the organization.

It is highly likely that a shareholder will withdraw capital (liquidity) from the organization.



Page | 36

5 Credit Rating Outlook

The credit rating outlook of a rated entity reflects ACRA’s opinion on the likely change in its

credit rating over a certain time interval (usually 12 to 18 months).

When preparing cash flow outlook and calculating forecast financial ratios, ACRA applies a

number of key assumptions that form a subjective internal source of information used for rating

assessment. They can be based on both ACRA’s internal calculations and information obtained

from the rated entity. Credit rating may be sensitive to changes in such assumptions, including

in the absence of new factual information about the rated entity’s operations. In the course of

rating assessment, ACRA also sets threshold ratios, the breach of which can result in a change

of credit rating.

Pursuant to the Procedure for Disclosure of Credit Ratings and Other Related Communications,

disclosure of the following information is mandatory when ACRA performs rating actions:

list of principal rating assumptions used when building outlooks;

list of principal key indicators and factors that the rated entity’s credit rating is sensitive

to, and threshold values of such indicators and factors.

When forecasting, ACRA may also adjust qualitative metrics if the Agency anticipates any

changes in internal and external risk factors that may lead to a change of assessment categories

for one or more qualitative metrics.

A change in the credit rating outlook is typically associated with ACRA’s internal forecasts of

possible changes in quantitative and qualitative factors and key internal and external risk

factors that affect the SCA score. At the same time, the credit rating outlook also depends on

changes in relations (if any) with the government or the supporting company, as anticipated

by the Agency. Changes in relationships with the government are assessed in accordance with

the Methodology for Analyzing Relationships between Rated Entities and the Government

(proprietary methodology by ACRA). Changes in relationships with the supporting company

are assessed pursuant to the Methodology for Analyzing Relationships Between Companies

within a Group and the Methodology for Analyzing Relationships between Rated Entities and

Supporting Organizations outside the Russian Federation (proprietary methodologies by

ACRA). The operating environment and economy trends are also taken into account when

determining the credit rating outlook.

A credit rating outlook is not necessarily a precursor to a change in credit rating.

6 Assigning Ratings to Various Debt Instruments

Credit ratings of bond issues of insurance organizations include an assessment of a relative

probability of default of that debt instrument and the potential recovery rate available to

holders of such securities in the event of bankruptcy of rated entities. The credit rating of issues

of financial instruments is assessed in accordance with the Methodology for Assigning Credit

Ratings to Individual Issues of Financial Instruments on the National Scale for the Russian

Federation.



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7 Approach to Verification of Fairness of the Methodology in

Accordance with Federal Law FZ-222

This methodology presumes that it is possible to verify the fairness of credit ratings assigned

on its basis. Verification approach and procedure are regulated by paragraphs 6.7.8 and 6.10

of the Methodology Committee Regulations as approved by ACRA’s Board of Directors.

8 Key Indicators Used in Analysis

Diversification of the customer base

Name of the metric: Hclient, a modified Herfindahl–Hirschman index.

Formula:

𝐻𝑐𝑙𝑖𝑒𝑛𝑡 = ∑ 𝑎𝑖𝑤𝑖2

𝑖

where:

i is the index of a large customer or a group of retail/corporate customers;

wi is the percentage of the insurance premium for a large customer or a group of

retail/corporate customers in the insurance portfolio;

ai is a ratio equal to 1 for large customers and 0.5, for retail/corporate customer groups.

Note: The definition for large customers and groups of retail/corporate customers is provided

in the text of the methodology.

Diversification of sales channels

Name of the metric: Hchannel, a modified Herfindahl–Hirschman index.

Formula:

𝐻𝑐ℎ𝑎𝑛𝑛𝑒𝑙 = ∑ 𝑎𝑖𝑤𝑖2

𝑖

where:

i is the index of a singular sales channel or a group of sales channels;

wi is the percentage of the insurance premium for a singular sales channel or a group of sales

channels in the insurance portfolio;

ai is a ratio equal to 1 for independent singular sales channels, 0.5, for independent groups of

sales channels and controlled singular sales channels, and 0.25, for controlled groups of sales

channels.

Note: Definition of independent singular sales channels, independent groups of sales channels,

controlled singular sales channels, and controlled groups of sales channels is presented in the

text of the methodology.



Page | 38

Efficiency for non-life insurance

Name of the metric: combined metric.

Formula:

𝑁𝑒𝑡 𝑐𝑙𝑎𝑖𝑚𝑠 𝑖𝑛𝑐𝑢𝑟𝑟𝑒𝑑 + 𝑁𝑒𝑡 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠

𝑁𝑒𝑡 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑒𝑎𝑟𝑛𝑒𝑑

Note: Net operating expenses are understood to mean the total sum of expenses incurred to

perform insurance transactions and manage the insurance organization less commission fee

revenue received from reinsurers. All metrics used are in accordance with IFRS reporting

statements (actual or as expected).

Name of the metric: net premium earned.

Formula:

𝑁𝑒𝑡 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑎𝑐𝑐𝑟𝑢𝑒𝑑

+ 𝑈𝑛𝑒𝑎𝑟𝑛𝑒𝑑 𝑛𝑒𝑡 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑟𝑒𝑠𝑒𝑟𝑣𝑒 𝑎𝑠 𝑎𝑡 𝑡ℎ𝑒 𝑠𝑡𝑎𝑟𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑

− 𝑈𝑛𝑒𝑎𝑟𝑛𝑒𝑑 𝑛𝑒𝑡 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑟𝑒𝑠𝑒𝑟𝑣𝑒 𝑎𝑠 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑

Note: All metrics used are in accordance with IFRS reporting statements (actual or as expected).

Name of the metric: net claims incurred.

Formula:

𝑁𝑒𝑡 𝑖𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 𝑝𝑎𝑦𝑜𝑢𝑡𝑠 − 𝑁𝑒𝑡 𝑙𝑜𝑠𝑠 𝑟𝑒𝑠𝑒𝑟𝑣𝑒 𝑎𝑠 𝑎𝑡 𝑡ℎ𝑒 𝑠𝑡𝑎𝑟𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑

+ 𝑁𝑒𝑡 𝑙𝑜𝑠𝑠 𝑟𝑒𝑠𝑒𝑟𝑣𝑒 𝑎𝑠 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑

Note: All metrics used are in accordance with IFRS reporting statements (actual or as expected).

Efficiency of life insurance

Name of the metric: return on assets.

Formula:

𝑁𝑒𝑡 𝑖𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 𝑝𝑟𝑒𝑚𝑖𝑢𝑚𝑠 − 𝑁𝑒𝑡 𝑝𝑎𝑦𝑜𝑢𝑡𝑠 − 𝑁𝑒𝑡 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑟𝑒𝑠𝑒𝑟𝑣𝑒𝑠


−𝑁𝑒𝑡 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠

𝑆𝑢𝑚 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠+

𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑟𝑒𝑣𝑒𝑛𝑢𝑒


Note: Net operating expenses are understood to mean the total sum of expenses incurred to

perform insurance transactions and manage the insurance organization less commission fee

revenue received from reinsurers. All metrics used are in accordance with IFRS reporting

statements (actual or as expected).

Capital adequacy

Name of the metric: available capital.

Formula:

𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 =

= 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠’ 𝑒𝑞𝑢𝑖𝑡𝑦 − 𝐼𝑛𝑡𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐷𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑎𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡𝑠

± 𝑂𝑡ℎ𝑒𝑟 𝑎𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡𝑠



Page | 39

Note: Shareholders’ equity, intangible assets, and deferred acquisition costs are in accordance

with the IFRS. Other adjustments are to be used if so decided by the Agency.

Name of the metric: ratio of available capital to capital at risk.

Formula:

𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑎𝑡 𝑟𝑖𝑠𝑘

Note: Capital at risk is calculated in accordance with the methodology.

Name of the metric: financial leverage ratio.

Formula:

𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝑠𝑢𝑚 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠 𝑎𝑛𝑑 𝑜𝑓𝑓 − 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 𝑠ℎ𝑒𝑒𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Note: Available capital is not decreased by the minimum amount of the charter capital for the

calculation of the leverage ratio. The sum of assets and off-balance sheet liabilities is adjusted

in conformity with the adjustments made when calculating available capital.

Liquidity

Name of the metric: current liquidity ratio.

Formula:

𝐿𝐴𝑐𝑙 + 𝐶𝑟𝐹𝑐𝑙

𝐶𝐿𝑖𝑎𝑏

where:

LAcl is the calculated amount of liquid assets for assessment of current liquidity;

CrFcl is the calculated amount of credit facilities established to cover temporary liquidity gaps,

used for assessment of current liquidity;

CLiab is the size of current financial liabilities, that is financial liabilities with a maturity of less

than one year. Financial liabilities are understood to means liabilities involving a mandatory or

potential payout of cash including current and deferred tax liabilities and the unearned

premium reserve.

Note: The size of current financial liabilities conforms to IFRS reporting statements (subject to

difference in the definition of the term “financial liabilities” in the IFRS and this methodology).

The size of liquid assets and credit facilities for assessment of current liquidity is calculated in

accordance with the methodology.

Name of the metric: long-term liquidity ratio.

Formula:

𝐿𝐴

𝐿𝑖𝑎𝑏



Page | 40

where:

LA is the size of liquid assets

Liab is the total size of financial liabilities. Financial liabilities are understood to means liabilities

involving a mandatory or potential payout of cash including current and deferred tax liabilities

and the unearned premium reserve.

Note: The total size of financial liabilities conforms to IFRS reporting statements (subject to

difference in the definition of the term “financial liabilities” in the IFRS and this methodology).

The size of liquid assets is calculated in accordance with the methodology.

Disclaimer

(С) 2020

Analytical Credit Rating Agency (Joint-Stock Company), ACRA (JSC)

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Analytical Credit Rating Agency (ACRA) was founded in 2015, with its 27 shareholders representing major Russian corporate and

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The assigned credit and non-credit ratings reflect all material information pertaining to a rated entity and known by ACRA (including

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Documents

Methodology for Assigning Credit Ratings to …...2020/06/30 · Credit ratings assigned under this methodology are reviewed pursuant to the requirements of the Federal Law No. 222-FZ,