Fitch Ratings today warned insurers against "ill-conceived diversification" of business lines and territories undertaken solely to produce better scores in rating agency capital models, suggesting that such attempts might in fact lead to downgrades.
In a joint comment released from Fitch's Chicago and London offices, analysts wrote that "concentrated insurers that diversify simply to benefit from rating agency and regulatory capital treatment are unlikely to see material benefits from this strategy in the early years, and in fact, could experience ratings downgrades."
The rating agency explained that while it is true that within an economic capital model such as Fitch's Prism model, "all else equal," an insurer that is diversified will require less capital than one that is concentrated, "all else equal" is never true in the real world.
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