Feldblum - rating agencies Flashcards
Importance of financial strength ratings to policyholders
Lack expertise to assess …
1) insurer financial strength
2) insurer ability to pay claims
Importance of financial strength ratings to insurers & reinsurers (4)
attract business
uncover solvency issues
advertise competitive advantage
charge more if A+ rating
Importance of financial strength ratings to regulator (2)
Unusual IRIS ratios okay if highly rated
pay more attention to poorly rated insurers
Why get multiple interactive ratings? (2)
- Use best one to advertise
- Use rating agency that specializes in debt or stock companies
recent critisicms of ratings aka shortcomings (3)
- Conflict of interest (paid for by insurers)
- Unreliable ratings (mortgage backed securities defaulted)
- Slow to adjust ratings (interactive meeting take months to meet w /management while stock market adjusts quickly)
Why insurers maintain ratings if they are expensive (3)
3rd parties don’t have expertise do ratings
3rd parties don’t trust unrated insurers
3rd parties rely on ratings to assess ability to pay claims
Incentive for rating agency to create more accurate model (2)
Increase public confidence in them
advertise competitive advantage
Incentive for rating agency to have high (& low) capital standards
high – hurt reputation if client goes insolvent & was low rated
low – give high rating to keep client happy to gain market share
Interactive rating process 5 steps
- Research – rating analyst & team: public data + insurer proprietary data (DON’T SHARE ANALYSIS W/ CLIENT)
- Meeting – rating analyst: qualitative interview w/ management, ask for materials
- Proposals- lead analyst proposes rating
- Decision – rating committee (new for each case & insurer doesn’t know who) decides rating & outlook (A+stable/negative)
- Publication – rating is public bc will leak anyway + private fee based publication for subscribers who want more detail
Reasons for downgrade from meeting (3)
- Lack of transparency (reluctant to disclose weakness, data, problems before they appear)
- Lack of honesty
- Lack of management knowledge
interactive meeting - what materials do rating agencies ask for? (5)
- annual statement
- company history
- investment strategy
- organizational chart
- product descriptions
interactive meeting - what is a rating advisor? (3)
help insurer prepare for insteractive meeting
Describe top down approach made by rating committee in the decision part of interactive rating process
Economy/industry at top
Insurance company bottom
interactive meeting - what are rating agencies interested in hearing about from insurer’s managers? (3)
industry trend knowledge
adverse scnario experience
current issues
Interactive rating process disadvantages (3)
- Intrusive: insurer must provide lots of info
- Expensive: insurer pays a lot
- Time-consuming: meetings w/ management
What does insurer get if it does not want to pay for interactive rating
why wouldn’t they want an interactive rating?
Public rating based on public data & no insurer input
Expect a downgrade
Compare rating agency capital captial requirements vs RBC captial requirements (4)
- quanitiative and qualitative components vs quantitative only
- capaital model isnt fixed vs fixed formula
- NO regulatory action vs YES regulatory action
- YES includes cat & operations risk vs NO includes cat & interest rate risk
Who does ratings? (3)
What does each specialize in?
AM Best
Moody’s - (specialize in debt)
S&P - (specialize in debt)
2 types of ratings issued by rating agencies
Bond (debt)
Financial strength (ability to pay claims)
2 categories of AM best ratings for financial strength
Secure
vulnerable
2 categories of AM best ratings for bonds
Investment grade
non-investment grade
AM best rating after earthquake
AM best rating for bond in default
S for suspended
d for default
Qualitative evaluations made by rating agency for captial requirements (4)
Management quality
ERM - do they mitigate ris?
Business strategy
Competitive advantages - are they sustainable?
Quantitative evaluations made by rating agency for captial requirements (2)
balance sheet strength
operating performance
