Feldblum - Rating Agencies Flashcards
Legislative response to criticism of rating agencies.
Law now requires extensive DISCLOSURE of rating agencies’ methods to help users understand ratings.
Importance of Financial Strength rating to buyers of insurance.
- help buyers assess insurer’s ability to pay claims
- some buyers MUST place business with highly rated insurers or reinsurers
How rating agencies ensure consistency across insurers. (3)
INFO-GATHERING: be consistent in info-gathering, assessment guidelines
ECONOMIC CAPITAL: relate financial ratings to economic capital
SEPARATION: the analysis & final rating should be issued by separate bodies
Shortcomings of rating agencies. (2)
CONFLICT OF INTEREST: rating agencies are paid by the companies they rate
RELIABILITY: Rating Agencies have high rantings to companies that went bankrupt
Define ‘interactive rating’.
An independent assessment of an insurer’s ability to pay claims BASED ON a comprehensive qualitative & quantitative analysis.
Advantage of ‘interactive rating’. (2)
- Best’s ratings are widely reviewed and likely reliable
- without an interactive rating, an insurer may remain unrated or given a public rating where insurer has less control over info used
Disadvantage of ‘interactive rating’. (3)
INTRUSIVE: insurer must provide detailed operational info
TIME-CONSUMING: requires extensive meetings with senior management
EXPENSIVE: insurer must pay for rating agencies to do the interactive rating
Briefly describe the 5 steps in interactive ratings by rating agencies.
RESEARCH: by rating analysts & insurer submits propriety info
MEETINGS: between rating analysts & insurer’s senior management for presentations
PROPOSAL: lead rating analyst prepares proposal & insurer may submit further info
DECISION: by rating committee
PUBLICATION: to public & fee-paying subscribers
Why do insurers maintain credit ratings with rating agencies? (3)
UNRATED INSURERS: agent are wary of unrated insurer
SOLVENCY ASSESSMENT: 3rd parties rely on ratings
EFFICIENCY: Agents/UWs/Regulators don’t have expertise to do their own ratings
Interactive meeting is to focus on quantitative or qualitative info?
Qualitative.
Identify Best, Moody, S&P rating models.
A.M.BEST: EPD (Expected Policy Deficit)
Moody’s: use stochastic cash flows to model economic capital
S&P: principle based models & ERM practices
Describe Best’s rating model: EPD
METHOD: EPD ratio = $P/$V
and Required Capital = $Z
$P = pure premium of treaty
$V = market value of reserves
Note: As Z$ increases, the EPD Ratio decreases
thus, SELECTION: choose required capital so that EPD ratio = 1%
Describe Moody’s rating model: Stochastic CF
METHOD: model is based on repeated simulation of loss distributions of separate risks
TIME HORIZON: project CFs until liabilities are settled
Describe S&P’s rating model: Principle-based
METHOD: evaluate insurer’s (Enterprise Risk Management, Internal capital model)
RATING:weighted average of S&P/insurer capital assessment
