Feldblum Flashcards
List types of ratings provided by Rating agencies
- Credit ratings for bonds
* Financial strength ratings for insurers
Give criticisms of the use of rating agencies
- Oligopolistic nature of rating agency industry
* Greater efficiency of free markets in determining bond yields
List reasons why Financial Strength Ratings are important to insurers
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
The Ratings Process focuses on quality of insurer’s managers and business strategy.
List a few factors that it considers:
- 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
Reasons that Unrated Insurers can be at disadvantage
- Independent agents may hesitate to use them
* Banks require property insurance from rated insurer for mortgages
Reasons that Public data insufficient for the Rating Agency analysis
- 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
Steps of an interactive rating
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
What happens if the insurer refuses an interactive meeting?
Agency may:
• Issue a public rating using public information
• Issue public rating to inform others that past rating is no longer valid
What type of data does the rating agency collect during the interactive meetings?
Underwriting, reserving, investment, and operating performance with supporting data
Broad categories of requests that agencies may make during the interactive meetings between ratings analysts and senior managers of the insurer
1 - High level requests
2 - Insurer specific based on business written
Reasons that an insurer with a rating from A.M. Best may request another rating from S and P, Moody’s or Fitch
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
List some examples of the extensive background material that the agency requests from the insurer
- 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
List some examples of high level requests that the agencies may make during the interactive meetings
Business strategy, risk concentration guidelines, how information travels from management to employees
Briefly explain the top-down approach used by the Rating Agencies
- Start with economic and industry forecasts
* Go to insurer’s position within the industry
Reasons that the Insurer should not withhold damaging data that is not requested
- Insurer loses credibility
- Makes agency look bad to investors
- May place insurer on ratings watch or lead to ratings downgrades
Reasons most insurers are rated
- Agents are cautious of unrated insurers
- Third-parties rely on outside assessments of insurer solvency
- Rating agencies are efficient at assessing financial strength
Reasons that the agencies are reluctant to change ratings too quickly
- Erroneous downgrades anger clients
* Erroneous upgrades ruin agency’s reputation
Briefly explain why high ratings are important for Re
- 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
List LOB where high ratings are important
- Re
- Surety
- Homeowners
- Structured settlements
These are high risk lines which require good ratings to attract business and to meet regulatory conditions
List the A.M. Best financial strength ratings:
- Secure (A++, A+, A, A-, B++, B+)
- Vulnerable (B, B-, C++, C+, C, C-, D)
- Under Supervision (E)
- In Liquidation (F)
- Rating Suspended (S)
Describe the ratings process
- 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
Why did financial crisis of 2008-2009 lead to rating agencies reconsidering the weighting of capital charges by risk?
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
Capital standards are different among rating agencies. Identify the capital model used by: AM Best, Moody’s, Fitch, Standard and Poor’s
- 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
What is the formula for Net Required Capital in AM Best’s BCAR? What are the components of NRC?
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
