Comparing AM Best, S&P, And Moody’s Capital Approaches

Why Compare Capital Approaches Carefully?

An insurer may appear in more than one rating agency’s analysis, and each analysis may discuss capital adequacy. That shared subject does not mean the agencies use the same capital definition, risk horizon, aggregation method, or rating benchmark. A ratio from one approach cannot be read as though it were a ratio from another simply because both are expressed as a percentage.

The useful comparison is structural: ask what the model is intended to assess, what it treats as available capital, which risks enter its requirement, and how the result relates to that agency’s rating framework. These questions build on the earlier material on risk charges, capital aggregation, and rating capital thresholds. The discussion here compares broad purposes and concepts; agency methodologies can change, and their details can vary by insurance sector, jurisdiction, and publication date.

Definition: A capital approach is a framework for assessing an insurer’s capital resources in relation to modeled or otherwise assessed risks. A capital adequacy output is a model result used as evidence about whether those resources are sufficient under the framework’s assumptions. Neither a model output nor a capital ratio is, by itself, a complete insurer rating.

Three Approaches, Three Frameworks

AM Best, S&P, and Moody’s each use capital analysis as one part of evaluating an insurer’s financial strength. Each framework has its own definitions and calibration. The names and mechanics of models may be revised over time, so comparisons should be made using the applicable methodology for the company and assessment date rather than relying on a remembered label alone.

AM Best’s Best’s Capital Adequacy Ratio, commonly called BCAR, is a risk-based capital adequacy tool. At a broad level, it relates capital resources after relevant adjustments to required capital for specified risks, with risk aggregation and diversification reflected according to the methodology. BCAR results are interpreted within AM Best’s own analytical and rating framework; a BCAR result is not a rating by itself.

S&P’s insurer capital analysis assesses capital adequacy in relation to the risks recognized by its applicable insurance capital model. The model’s treatment of resources, risk charges, and aggregation is determined by S&P’s methodology for the relevant business. Its capital adequacy result is considered as part of S&P’s broader credit analysis, not as a stand-alone statement that guarantees a particular rating.

Moody’s insurance capital analysis likewise evaluates capital resources against risks under its own framework. Moody’s methodologies have used capital adequacy measures, including the Insurance Capital Adequacy Ratio (ICAR) in relevant contexts. The specific treatment of capital, risk categories, adjustments, and benchmarks must be read from the applicable methodology. An ICAR or other capital output should not be presumed to use another agency’s numerator or denominator.

Comparison dimension	AM Best	S&P	Moody’s
Broad purpose	Assess capital adequacy for insurance risks within AM Best’s analytical framework	Assess insurer capital adequacy within S&P’s credit analysis	Assess capital adequacy within Moody’s insurance analysis
Capital concept	Capital resources and risk-based required capital as defined by the applicable BCAR methodology	Capital resources and risk requirements as defined by the applicable S&P model	Capital resources and requirements as defined by the applicable Moody’s methodology
Risk coverage	Specified risk categories and adjustments in the applicable methodology	Specified risk categories and adjustments in the applicable methodology	Specified risk categories and adjustments in the applicable methodology
Interpretation	Read against AM Best’s own calibration and rating analysis	Read against S&P’s own calibration and rating analysis	Read against Moody’s own calibration and rating analysis

The table is intentionally broad. It does not imply that any two agencies include exactly the same risks, apply identical adjustments, or use a common target capital level. Those points must be checked in the applicable methodology.

What Makes Capital Outputs Non-Interchangeable?

A ratio is meaningful only after its numerator and denominator are defined. One framework might adjust reported capital in ways another does not; required capital may reflect different risk categories, stress assumptions, or aggregation rules. Even when two results are both presented as percentages, one percentage may compare a different measure of resources with a different measure of required capital.

The same caution applies to labels such as “capital adequacy ratio” or “required capital.” A common label does not establish common measurement. In addition, a model’s threshold or benchmark is tied to that model’s calibration and the agency’s rating framework. A ratio of 150% in one framework does not automatically indicate the same margin, risk tolerance, or rating implication as 150% in another.

Key rule: Before comparing capital results, identify the agency and methodology, the assessment date, the capital-resource definition, the risks included in required capital, the aggregation method, and the benchmark used to interpret the result. If any of these differ or are unknown, a direct numerical comparison is not justified.

A Simple Ratio and Its Limits

For a simplified illustration, define a model-specific capital ratio as available capital divided by required capital. This expression is useful for understanding the mechanics of a ratio, but it is not a universal formula for every agency’s reported output. Use it only when the stated capital and requirement have been defined consistently within the particular model.

R=\frac{C}{K}\times 100\%

Here $C$ is the model-defined available capital and $K$ is the model-defined required capital, with $K>0$. If $C$ and $K$ are measured in the same monetary units, their units cancel. A value above 100% means that the defined capital amount exceeds the defined requirement; it does not, without the model’s benchmark and methodology, establish a particular agency rating or indicate equivalence with another agency’s result.

Worked Examples: Comparing the Meaning, Not Just the Number

Worked Example: Same Ratio, Different Definitions

Hypothetical illustration. Two independent rating approaches report a simplified capital ratio of 140% for a fictional property insurer. In Approach A, model-defined available capital is $700 million and required capital is $500 million. In Approach B, available capital is $560 million and required capital is $400 million. What can be concluded? This is a deterministic ratio exercise: no interest rate, mortality assumption, probability distribution, or stochastic parameter is used.

Method. Calculate each ratio from its own stated numerator and denominator, then compare the results without assuming the definitions are the same.

For Approach A:

R_A=\frac{700}{500}\times100\%=1.4\times100\%=140\%.

For Approach B:

R_B=\frac{560}{400}\times100\%=1.4\times100\%=140\%.

The arithmetic check is direct: $700=1.4(500)$, and $560=1.4(400)$. Both ratios are 140%. However, the figures alone do not establish that the insurer has the same capital strength under both approaches. For example, the approaches might define adjusted capital differently or recognize different risks in required capital. Those possibilities must be checked in the actual methodology rather than inferred from this hypothetical data.

Common mistake avoided: concluding that equal percentages prove equal capital adequacy. Equal ratios establish only equal quotient values for the stated inputs.

Worked Example: Different Ratios with Different Requirements

Hypothetical illustration. A fictional life insurer is assessed under two simplified approaches. Approach A reports $900 million of available capital and $600 million of required capital. Approach B reports $840 million of available capital and $700 million of required capital. Calculate the ratios and explain the comparison. No interest rate, mortality assumption, probability distribution, or stochastic parameter is used; all inputs are deterministic and already stated in each approach’s own units and definitions.

Approach A.

R_A=\frac{900}{600}\times100\%=1.5\times100\%=150\%.

Check: $1.5\times600=900$, so the calculation reconciles.

Approach B.

R_B=\frac{840}{700}\times100\%=1.2\times100\%=120\%.

Check: $1.2\times700=840$, so this calculation also reconciles. Within the simplified figures, Approach A reports a ratio 30 percentage points higher than Approach B. That is a valid numerical description of these inputs. It is not sufficient to say that Approach A necessarily views the insurer as stronger: differences in capital adjustments, risk coverage, aggregation, or agency-specific calibration could explain part or all of the gap.

Common mistake avoided: treating the difference as a direct agency-to-agency ranking. A ranking requires comparable definitions and an appropriate common interpretation, neither of which is supplied by the ratios alone.

Worked Example: A Threshold Is Model-Specific

Hypothetical illustration. A fictional insurer has $720 million of available capital under a single simplified model. The model’s stated reference requirement is $600 million. A manager asks whether the result clears a 125% benchmark. Calculate the ratio, margin over the requirement, and excess over the benchmark amount. No interest rate, mortality assumption, probability distribution, or stochastic parameter is used.

Calculate the ratio.

R=\frac{720}{600}\times100\%=1.2\times100\%=120\%.

The ratio is below 125% by $125\%-120\%=5$ percentage points. To express the benchmark as an amount of capital, multiply the requirement by 1.25:

1.25(600)=750\text{ million dollars}.

The available capital is $720 million, so the shortfall relative to that benchmark amount is $750-720=30$ million dollars. The ratio check is $720=1.2(600)$. This conclusion holds only for the hypothetical model and benchmark as stated. It cannot be carried over to another agency’s benchmark.

Common mistake avoided: comparing available capital with the requirement as though “above 100%” necessarily met the relevant benchmark. Here the capital exceeds the requirement but does not reach the stated 125% benchmark.

Why the Ratio Formula Holds—and What It Does Not Prove

The ratio expresses capital as a multiple of the requirement. If the available capital equals the requirement, then $C=K$, so $C/K=1$, or 100%. If capital is one and one-quarter times the requirement, then $C=1.25K$, so the ratio is 125%. This follows directly by substitution:

C=mK\quad\Longrightarrow\quad\frac{C}{K}\times100\% =\frac{mK}{K}\times100\% =m\times100\%,\qquad K>0.

This derivation explains the ratio’s scale interpretation. It does not show that two models use the same $C$ or $K$, nor does it derive an agency’s calibration. The formula is therefore a calculation aid, not a conversion rule between agencies.

A Disciplined Comparison Process

When reviewing multiple capital assessments, separate the arithmetic comparison from the methodological comparison. The first can identify numerical differences. The second asks whether those differences arise from genuinely different views of the insurer or from different measurement frameworks.

Identify the framework.
Record the agency, model or methodology, insurance business assessed, and date of the assessment.

Define the reported output.
Determine whether the result is a ratio, capital amount, benchmark comparison, or another model output.

Check the inputs and scope.
Review how the framework defines available capital and which risks and adjustments enter the requirement.

Read the model-specific interpretation.
Use the applicable agency benchmark; do not import a threshold or rating implication from another framework.

State the comparison at the supported level.
If definitions are not aligned, report the figures separately and describe the limitation rather than claiming direct equivalence.

Common Comparison Traps

Comparing percentages without definitions. A shared percentage format does not guarantee matching numerators or denominators.
Confusing a model result with a rating. Capital adequacy is an analytical input; an agency’s rating assessment is broader than one capital output.
Assuming identical risk coverage. Different frameworks may include, classify, or aggregate risks differently. Verify the applicable methodology.
Applying one agency’s benchmark to another agency’s result. A threshold is meaningful in its own calibration and context.
Ignoring methodology dates and business scope. A result for one sector, entity, or assessment date may not be comparable with a result from another setting.

A careful analyst therefore distinguishes three statements: “the reported ratios differ,” “the approaches measure capital differently,” and “one agency views the insurer more favorably.” The first may follow from arithmetic; the second requires methodology knowledge; the third requires interpretation within each agency’s complete analytical framework. Do not move from the first statement to the third without evidence.

Key takeaway: AM Best, S&P, and Moody’s use capital analysis to inform their respective insurer assessments, but their capital resources, risk requirements, aggregation, and benchmarks are not automatically aligned. Compare the framework and definitions before interpreting the number.

Check Your Understanding

For each problem, state the calculation and keep the conclusion within the information provided.

A hypothetical model reports $660 million of available capital and $550 million of required capital. Calculate the simplified capital ratio. (Answer: 120%)
Two hypothetical agency approaches report ratios of 135%. Does this alone establish that they use equivalent capital definitions? (Answer: No; equal ratios alone do not establish equivalent definitions or calibration.)
A model has $480 million of available capital and $400 million of required capital. Its stated benchmark is 115%. Calculate the ratio and the capital amount needed to meet the benchmark; state the shortfall or excess. (Answer: 120%; benchmark amount $460 million; excess $20 million.)
Approach X reports a 145% ratio and Approach Y reports 130%. The available-capital definitions and risk scopes are not provided. What is the strongest justified comparison? (Answer: X’s reported ratio is 15 percentage points higher, but the figures alone do not establish which approach indicates stronger capital adequacy.)
A hypothetical insurer has $1,050 million of model-defined available capital and a $750 million requirement. Calculate the ratio. If a separate agency uses a 125% benchmark, may that benchmark be applied to this model without further support? (Answer: 140%; no, a benchmark from another agency cannot be applied without evidence that it is appropriate to this model.)

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