Feld.RtAgs

Question 1

Briefly explain the legislative response to criticism of rating agencies

Answer 1

Law now requires extensive DISCLOSURE of rating agencies’ methods to help users understand ratings

Question 2

Briefly explain the importance of Financial Strength ratings to buyers of insurance

Answer 2

• helps buyers assess insurer’s ability to pay claims
• some buyers MUST place business with highly rated insurers or reinsurers

Question 3

Identify 3 measures taken by rating agencies to ensure consistency across insurers?

Answer 3

There should be consistency in INFO-GATHERING and assessment guidelines
Ratings should be related to ECONOMIC CAPITAL measures
SEPARATION: the analysis & final rating should be issued by separate bodies

Question 4

Identify 2 shortcomings of Rating Agencies

Answer 4

CONFLICT of INTEREST: Rating Agencies are paid by the companies they rate
RELIABILITY: Rating Agencies gave high ratings to companies that went bankrupt (Ex: Enron)

Question 5

Define ‘interactive rating’

Answer 5

An independent assessment of an insurer’s ability to pay claims BASED ON a comprehensive qualitative & quantitative analysis

Question 6

Identify 2 advantages of interactive rating.

Answer 6

1. Best’s ratings are widely reviewed & likely reliable
2. Without interactive ratings, an insurer may remain unrated (Or be given a public rating where insurer has less control over info used)

Question 7

Identify 3 disadvantages of interactive ratings. (Hint = TIE)

Answer 7

1. Time-consuming:
   - requires extensive meetings with senior management
2. Intrusive:
   - insurer must provide detailed operational info
3. Expensive:
   - insurer must pay for rating agencies to do the interactive rating

Question 8

Briefly describe the 5 steps in interactive ratings by rating agencies

Answer 8

1. RESEARCH: by ratings analysts + insurer submits proprietary info
2. MEETINGS: between rating analysts & insurer’s senior management for
   presentations
3. PROPOSAL: lead ratings analyst prepares proposal + insurer may submit
   further info
4. DECISION: by ratings committee
5. PUBLICATION: to public & fee-paying subscribers

Question 9

Identify 3 examples where a high financial rating is particularly important

Answer 9

1. Reinsurance:
   - if downgraded, a reinsurer may not be able to renew treaties
2. Low-frequency / high-severity lines:
   - harder to assess risk and a high rating proves insurer can pay claims
   (Ex: surety insurance)
3. Mortgage insurance:
   - lenders may require mortgage insurance from a highly-rated company

Question 10

Why do insurers maintain credit ratings with rating agencies (3)

Answer 10

UNRATED INSURERS: agents are wary of unrated insurers
SOLVENCY ASSESSMENT: 3rd parties rely on ratings
EFFICIENCY: agents, underwriters, & regulators don’t have expertise to do their own rating

Question 11

In interactive meetings, is the focus on qualitative or quantitative info?

Answer 11

Qualitative

Question 12

Identify Best, Moody and S&P rating or capital standard model

Answer 12

A.M. BEST:
- EPD (Expected Policy holder Deficit)
MOODY’S:
- use stochastic cash flows to model economic capital
STANDARD & POOR’S:
- PB (principles-based) models & ERM practices (Enterprise Risk Management)

Question 13

Describe Bests’ rating model: expected policy holder deficit

Answer 13

Method:
EPD = $P / $V
$P = pure premium of treaty
$V = market value of reserves
SELECTION:
==> choose required capital so that EPD = 1%

Question 14

Describe Moody’s rating model: stochastic CF

Answer 14

Method:
Model is based on repeated simulations of loss distributions of separate risks

Time Horizon:
Project cash flows until liabilities are settled

Question 15

Describe S&P’s rating model: PB (principles-based)

Answer 15

Method:
Evaluate insurer’s ERM (Enterprise Risk Management) & internal capital model

Rating:
Weighted average of S&P & insurer capital assessment