ERM links to Credit Rating
Have you ever wondered how ERM links to Credit Rating? One is about financial stability (or debt repayment capabilities to be precise) and the other one deals with potential upside and downside of the business. So where is the link?
ERM as a key component
AM Best’s rating methodology outlines the connection very well . The picture below depicts the importance of good ERM as one of the rating adjustment factors. For example, if your ERM efforts are very good, the rating can increase by one notch (the +1 in the ERM box). However, if your ERM efforts falls short of expectation, there is a potential of 4 notches downward adjustment (the “-4” in the box).
At first glance, it appears a daunting task to embed ERM into a rating process. The crux of the matter is to set-up a robust process and then use it, learn from the outcomes and amend as you go along. I have described the steps in setting up a ERM framework in several blog posts. Credit rating agencies look for the robustness of the ERM-approach. Furthermore, they seek evidence that ERM is an integral part of strategy setting.
As an experienced ERM-practicioner and business executive who has dealt with rating agencies for several years, I’m well positioned to support you in making the ERM-Credit Rating link effective.
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btw: Picture is taken from publicly available material.