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Open Meeting of the Advisory Committee on 

Risk-Sharing Mechanisms

Stefan Holzberger – Chief Ratings Officer, AM Best 

Michael Lagomarsino – Senior Director, AM Best

February 1, 2024 
AM Best’s Ratings – The Interactive Rating Process

• The foundation of the rating 

process is an ongoing dialogue 

with the rated company’s 

management

• Ratings are determined by a 

rating committee

• Ratings process outlined in 

Best’s Credit Rating 

Methodology (BCRM)

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Building Block Approach

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Baseline

Balance 

Sheet 

Strength

Baseline

Operating 

Performance

(+2/-3)

Business 

Profile

(+2/-2)

Enterprise Risk 

Management

(+1/-4)

Comprehensive 

Adjustment

(+1/-1)

Rating 

Lift/Drag

Issuer Credit 

Rating

Country Risk

Maximum + 2

Underwriting affirmative cyber, where material, impacts multiple building blocks and financial strength. 
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Rating Considerations for Affirmative Cyber 

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Balance Sheet 

Strength

• Risk-adjusted 

capitalization

• Cyber modelling

• Stress testing

• Reinsurance

• Reserve adequacy

• Liquidity

Operating 

Performance

• Underwriting & 

earnings volatility

• Business plans and 

assumptions

• Track record

Business Profile

• Product 

concentration risk

• High product risk

• Limits offered

• Industries covered

• Management 

expertise 

Enterprise Risk 

Management

• Risk appetite & 

tolerances

• Risk aggregation 

• Risk management 

capabilities

• Stress testing
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Incorporating Catastrophe 

Risk & Stress Testing Into the 

Ratings Process
Why Incorporating Catastrophe Risk & Stress Testing is Necessary? 

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Effectively managing exposure to catastrophe events is essential to protecting and 

preserving balance sheet strength

Catastrophes – both natural and man-made – can abruptly impair an insurer

Stress Testing allows AM Best to capture the uncertainties inherent in an insurer’s 

operations and business plans 
Catastrophe Risk

Rating Considerations

Aggregate exposure

Modelled PMLs

Management’s view

Historical losses 

Examples

Natural catastrophes

Terrorism exposure

Casualty clash

Cyber catastrophe

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Deterministic scenarios
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Stress Testing Risk Adjusted Capital

• Used in Balance Sheet Strength and ERM assessments

‒ Natural catastrophe, terror, surety, pandemic, cyber, other 

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53.7

37.2

24.8

18.5

-11.1

33.7

15.2

-0.2

-11.5

-51.1

-60

-40

-20

0

20

40

60

Var 95 Var 99 Var 99.5 Var 99.6 Var 99.8

BCAR

Standard BCAR Stressed BCAR

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AM Best’s Cyber Questionnaire 
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AM Best’s Cyber Questionnaire 

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• Nature of the portfolio

• Cyber risk appetite and underwriting strategy

• Reinsurance (traditional and non-traditional)

• Use of third parties

ERM & 

Cyber Strategy

• Types of coverage offered 

• Limits & retention levels

• Types of insureds & geographies

• Loss ratios, number of claims paid versus reported 

Profile &

Performance

• PMLs

• Deterministic scenarios

• Capital Stress

Balance Sheet
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How Companies are Managing 

Cyber Risks
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How Companies are Managing Cyber Risks 

• Managing exposure through underwriting and risk transfer

- Policy wording (i.e., war exclusions, addressing “silent” cyber)

- Coverage terms and conditions 

- Utilizing vendor tools 

- Assessing aggregation risk

- Risk transfer through cyber reinsurance treaties

• Cyber specialists: real-time exposure monitoring 

• Cyber models continue to mature

• Data quality and consistency continue to improve

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AM Best’s Thoughts on a 

Government Backstop
Government Backstop – Potential Benefits & Challenges

Potential Benefits

• Avoids lengthy economic downturn and financial 

market volatility

• Promotes improved cyber hygiene and enhanced 

risk management capabilities 

• Leads to greater take-up rates for cyber cover 

while attracting reinsurance capacity

• Promotes consistency in policy wording

• Broad definition of triggering events and clear 

certification process 

• More permanent the backstop the better

• Program trigger designed to protect insurers of all 

size

Challenges & Possible Pitfalls

• Leads to lax cybersecurity by insureds

• Removes incentives of insurers to continue to 

push for stronger cyber hygiene 

• Impedes the development of new or redesigned 

cyber insurance products and solutions

• Motivates threat actors to exploit vulnerabilities 

knowing the federal government will indemnify 

losses

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Q&A
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Thank you!
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