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Examen 6 Partie C/D > Feldblum > Flashcards

Feldblum Flashcards

1
Q

List types of ratings provided by Rating agencies

A
  • Credit ratings for bonds

* Financial strength ratings for insurers

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2
Q

Give criticisms of the use of rating agencies

A
  • Oligopolistic nature of rating agency industry

* Greater efficiency of free markets in determining bond yields

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3
Q

List reasons why Financial Strength Ratings are important to insurers

A

1 - Assess ability to pay claims
2 - Re desire investment grade ratings to retain business 3 - Independent agents use to place customers with higher rated insurers

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4
Q

The Ratings Process focuses on quality of insurer’s managers and business strategy.
List a few factors that it considers:

A
  • Knowledge of industry trends
  • Experience with adverse scenarios
  • Handling of current problems
  • Doesn’t cover UW or investment decisions, as both can be distorted by random fluctuations
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5
Q

Reasons that Unrated Insurers can be at disadvantage

A
  • Independent agents may hesitate to use them

* Banks require property insurance from rated insurer for mortgages

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6
Q

Reasons that Public data insufficient for the Rating Agency analysis

A
  • Investment schedules have little detail on derivatives
  • Re data doesn’t show attachment points / limits
  • Reserve schedules may not show the same segmentation that the insurer uses
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7
Q

Steps of an interactive rating

A

1 - Background research by ratings analyst and proprietary data submitted by insurer
2 - Interactive meetings between ratings analysts and senior managers of the insurer
3 - Preparation of ratings proposal by lead analyst and additional data submitted by insurer
4 - Decision by the ratings committee after lead analyst presents proposal
5 - Rating published

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8
Q

What happens if the insurer refuses an interactive meeting?

A

Agency may:
• Issue a public rating using public information
• Issue public rating to inform others that past rating is no longer valid

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9
Q

What type of data does the rating agency collect during the interactive meetings?

A

Underwriting, reserving, investment, and operating performance with supporting data

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10
Q

Broad categories of requests that agencies may make during the interactive meetings between ratings analysts and senior managers of the insurer

A

1 - High level requests

2 - Insurer specific based on business written

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11
Q

Reasons that an insurer with a rating from A.M. Best may request another rating from S and P, Moody’s or Fitch

A

1 - May want to issue debt through a holding company and wants rating from agency with xp in debt ratings
2 - Public company may want rating from agency better known to investors
3 - May not like current rating and believes second will be better

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12
Q

List some examples of the extensive background material that the agency requests from the insurer

A
  • Statutory AS and GAAP FS
  • History of company focusing on major events with biographies of senior executives
  • Investment strategy and guidelines
  • Organizational charts
  • Product descriptions and business strategy by LOB
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13
Q

List some examples of high level requests that the agencies may make during the interactive meetings

A

Business strategy, risk concentration guidelines, how information travels from management to employees

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14
Q

Briefly explain the top-down approach used by the Rating Agencies

A
  • Start with economic and industry forecasts

* Go to insurer’s position within the industry

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15
Q

Reasons that the Insurer should not withhold damaging data that is not requested

A
  • Insurer loses credibility
  • Makes agency look bad to investors
  • May place insurer on ratings watch or lead to ratings downgrades
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16
Q

Reasons most insurers are rated

A
  • Agents are cautious of unrated insurers
  • Third-parties rely on outside assessments of insurer solvency
  • Rating agencies are efficient at assessing financial strength
17
Q

Reasons that the agencies are reluctant to change ratings too quickly

A
  • Erroneous downgrades anger clients

* Erroneous upgrades ruin agency’s reputation

18
Q

Briefly explain why high ratings are important for Re

A
  • Many Re are not licensed in the U.S.
  • Often cover long-tailed, CAT, or other large claim-risks. So, primary insurers need financially strong Re
  • Strongly capitalized Re can charge higher premiums
  • Re treaties may specifically link ratings and security
19
Q

List LOB where high ratings are important

A
  • Re
  • Surety
  • Homeowners
  • Structured settlements

These are high risk lines which require good ratings to attract business and to meet regulatory conditions

20
Q

List the A.M. Best financial strength ratings:

A
  • Secure (A++, A+, A, A-, B++, B+)
  • Vulnerable (B, B-, C++, C+, C, C-, D)
  • Under Supervision (E)
  • In Liquidation (F)
  • Rating Suspended (S)
21
Q

Describe the ratings process

A
  • Intrusive, time consuming, and expensive
  • Focus on quality of insurers managers and business strategy
  • Insurers choose what to include in presentations
  • Ratings analyst evaluate integrity of insurers
22
Q

Why did financial crisis of 2008-2009 lead to rating agencies reconsidering the weighting of capital charges by risk?

A

1 - Large losses have been caused by CAT, equity, and financial derivatives
2 - Little adv development on major lines reserves
3 - Asbestos reserves led to large losses
4 - Re recoverables have led to few problems

23
Q

Capital standards are different among rating agencies. Identify the capital model used by: AM Best, Moody’s, Fitch, Standard and Poor’s

A
  • AM Best uses Expected PH Deficit (EPD) ratio
  • Moody’s and Fitch use stochastic CF models to asses capital requirements (VaR, TVaR)
  • SandP focuses on principles-based models, evaluating internal capital models and ERM practices
24
Q

What is the formula for Net Required Capital in AM Best’s BCAR? What are the components of NRC?

A

sqrt(B1^2+B2^2+B3^2+B4^2+B5^2+B6^2)+B7

B7: off-balance sheet risks
B1-6: bond, equity, interest rate, credit, reserves, and new business risks

Examen 6 Partie C/D (31 decks)

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