Feldblum Ratings Flashcards
How can bond ratings make markets more efficient?
by reducing information costs
Who works for rating agencies?
Actuaries, financial analysts, economists
Are rating agencies well-paid?
Yes, insurers may spend a million or more a year on ratings
Why do insurers care about ratings?
Unwary: Unrated reinsurers may be at a disadvantage; agents are hesitant, and banks may not issue mortgages without property coverage from a RATED insurer
Solvency: Solvency assessments are vital to the insurer; third parties rely on this; agents might be sued for placing business with financially weak insurer, need for reinsurance
Efficiency: Many others are not as qualified to perform assessment of financial strength
What are some key downsides to interactive rating?
Time Consuming
Intrusive
Expensive
What are the 5 steps of interactive rating?
Research: Background research is done by rating analyst and insurer submits proprietary data
Meeting: interactive meetings between rating analysts and senior managers of the insurer
Proposal: preparation of ratings proposal by lead analyst and submission of additional data
Decision: decision by rating committee after presentation by lead analyst
Publication: publish the rating on public web sites and provision of analysis to fee-paying subscribers
Describe three reasons an insurer may want a 2nd rating.
May want to issue debt through holding company and seeks a rating from an agency with more experience
May be publicly traded and want a rating from a more well-known agency
May be dissatisfied with the rating and believe the second will be better
Why is public data insufficient for rating?
Reinsurance data doesn’t show attachment points and limits
Investment schedules have scant data on derivatives
Reserving schedules don’t show segmented data that insurers use in their estimates
Why should an insurer not withhold potentially damaging data?
Loses credibility
Worsens agency’s reputation with investors
May place insurer on rating watch until next meeting, less like to trust in the future
Analyst will assign the worst-case outcome in the absence of data
List some key background material for meetings.
SAP & GAAP Financial Statements (past 5 years)
History of the company; major events, M&A, expansions
Investment strategy, policy, guidelines
Organizational Charts
Product descriptions and business strategy
Are ratings done by a single analyst?
To promote consistency, rating is made by ratings committee, not a single analyst
Rating committee has no permanent members, formed anew for each case; insurer doesn’t know the members
What is the top-down approach rating agencies take?
Start with economic and industry forecast and go down to insurer’s position amount its peers
Why are agencies hesistant to abruptly change ratings?
Erroneous downgrades anger clients
Erroneous upgrades ruin agency’s reputation with investors & clients
Why are ratings important for insurers?
Important for reinsurance, surety, HO, some specialty
Reinsurers need it, insurer can use their rating as a tool
Necessary to compete with other insurers
Some treaties have downgrade clause where if reinsurer drops a rating, it must deposit funds or provide LOC
Surety ensures construction firm will complete project
Some may require firms to get surety contracts from A rated companies
Some require life annuities from A rated insurers
How did rating agencies adapt their capital standards from RBC?
Modified to include risks like interest rate, catastrophe, A&E
Changed RBC from worst case year to VaR, TVaR, EPD
