Exam 6 Bottom 15% Flashcards
identify exhibits/notes/interrogatories/Schedules in the Ann. Stmt. that support an actuary’s assertion that reserve increase is NOT due to prior inadequacy
Schedule P - Part 2 (ultimate losses)
supports actuary if it shows minimal reserve development
Schedule F - Part 1 (assumed reinsurance)
supports actuary it is shows MORE assumed reinsurance
Schedule F - Part 3 (ceded reinsurance)
supports actuary it is shows LESS ceded reinsurance (since reserves are shown net of reinsurance)
5-Year Historical Data:
supports actuary if it shows a mix shift from short-tail → long-tail lines (which tends to increase reserves)
General Interrogatories:
supports actuary if there was a merger
Notes to the Financial Statements:
supports actuary if there was a commutation of reserves
supports actuary if there was an increase in pooling percentage for company
why do we bother with financial strength ratings at all
for policyholders:
financial strength ratings help buyers assess an insurer’s ability to pay claims
some buyers MUST place business with highly rated insurers or reinsurers
if the potential policyholder is an insurer seeking reinsurance, the insurer may require the reinsurer have a high rating
for P&C insurers:
a high rating can help insurers get business
a financial strength rating by a rating agency can uncover potential solvency issues without involving a regulator
identify the importance of financial strength ratings to reinsurers
same as for insurers:
a high rating can help reinsurers get business
a financial strength rating by a rating agency can uncover potential solvency issues without involving a regulator
plus:
some insurers must place business with highly rated reinsurers
if downgraded to below investment grade, a reinsurer may not be able to renew its treaties and thus lose business
who does financial strength ratings
A.M. Best:
has the most experience with financial strength ratings of insurers
Moody’s:
focuses more on debt ratings (versus overall financial strength ratings)
S&P (Standard & Poor’s):
focuses more on debt ratings (versus overall financial strength ratings)
how are financial strength ratings done
All 3 agencies use something called interactive rating as an overall methodology but they differ in their specific rating or capital model
how do rating agencies ensure consistency across insurers
- standard information-gathering & assessment guidelines
- ratings are related to economic capital
- analysis & final rating should be issued by separate bodies.
describe shortcomings of rating agencies
conflict of interest
rating agencies are paid by the companies they rate
history of unreliability
rating agencies have given high ratings to companies that then went bankrupt.
E.g. Enron
identify the legislative response to criticism of rating agencies
law now requires extensive DISCLOSURE of rating agencies’ methods to help users understand ratings
why might rating agencies prefer stability over responsiveness in their rating methodology
-stability increases trust in ratings
-being too responsive might mean responding to statistical noise (versus signal)
what is the broad description of ‘interactive rating’
a comprehensive qualitative & quantitative evaluation of an insurer’s ability to pay claims (financial strength)
describe the 5 steps of the interactive rating process
RM-PDP
Research: by ratings analysts (insurer submits proprietary info)
Meeting: between rating analysts & insurer’s senior management for presentations
Proposal: the rating analyst leader proposes a rating (insurer may submit further info)
Decision: by ratings committee
Publication: to public & fee-paying subscribers
(these 5 steps should provide a comprehensive evaluation of the company)
What are drawbacks to the interactive rating methodology?
[Hint: it TIEs up company resources]
Time-consuming: requires extensive meetings with senior management
Intrusive: insurer must provide detailed operational info
Expensive: insurer must pay for rating agencies to do the interactive ratings
if interactive ratings are such a royal pain, why do insurers bother with them
USE
Unrated insurers: agents are wary of unrated insurers
Solvency assessment: 3rd parties such as regulators or investors may rely on a rating agency’s assessment
Efficiency: agents, underwriters, regulators don’t have the expertise to evaluate the financial strength of an insurer
if rating agency concludes that an insurer’s financial strength has changed in a material way, what reporting options are available
- downgrade or upgrade insurer’s rating
- change the outlook (do not upgrade or downgrade)
→ rating agencies hesitate to change ratings too quickly to avoid angering paying clients (if their rating is downgraded) and to maintain consistency & reputation among users of financial ratings
which responds faster to shocks: rating agencies or bond/stock market (why)
- bond/stock market is faster
responds almost immediately - rating agencies may take months
interactive ratings are time-consuming
but can properly verify info and that the shock was real, not just noise
in the ‘meeting’ phase of an interactive rating, is the focus on gathering qualitative or quantative info
Qualitative
identify (Best, Moody, S&P) rating models (capital standard models)
A.M. BEST:
- EPD (Expected Policyholder Deficit)
MOODY’S:
- use stochastic cash flows to model economic capital
STANDARD & POOR’S:
- PB (principles-based) models & ERM practices (Enterprise Risk Management)
fully describe A.M. Bests’ rating model
Method:
- EPD = $P / $V
- $P = pure premium of treaty
- $V = market value of reserves
SELECTION:
- choose required capital so that EPD = 1%
fully describe Moody’s rating model
Method:
- model is based on repeated simulations of loss distributions of separate risks
Time Horizon:
- project cash flows until liabilities are settled
fully describe Standard & Poor’s rating model
Method:
- evaluate insurer’s ERM (Enterprise Risk Management) & internal capital model
Rating:
- weighted average of S&P & insurer capital assessment
identify incentives for rating agencies to create more accurate capital models
- increase public confidence in rating agencies
- increase competitive advantage against other rating agencies
identify an incentive for a rating agency to have high (or low) capital standards
high standards:
- ensures highly rated insurers are truly able to withstand stress events
low standards:
- rating agency may gain market share because weak insurers may still receive a good rating
compare the capital models used by rating agencies vs RBC
Method:
- rating agencies may use stochastic model & qualitative considerations
- RBC uses a fixed formula, quantitative only
regulatory action:
- rating agencies have no regulatory authority
- RBC results can initiate regulatory action
Data:
- rating agencies use confidential company data
- RBC uses public data
All risks:
- rating agencies can include any relevant risks
- RBC is constrained by the given formulas
identify an advantage of the capital model used by A.M. Best
- models individual risks then combines risks using a covariance adjustment (similar to RBC)
- sets capital level so that EPD (Expected Policyholder Deficit) = 1%
- GOOD because tail risks are modeled better than RBC’s ‘worst-case’ approach