Feld.RtAgs Flashcards

1
Q

Briefly explain the legislative response to criticism of rating agencies

A

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

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2
Q

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

A
  • helps buyers assess insurer's ability to pay claims
  • some buyers MUST place business with highly rated insurers or reinsurers
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3
Q

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

A
  1. Relate ratings to economic capital measures
  2. Issue ratings by committees independent from the ratings analyst
  3. Review ratings periodically
  4. Collect consistent information from companies and follow consistent guidelines in assessing the information
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4
Q

Identify 2 shortcomings of Rating Agencies

A
  • 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)
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5
Q

Define ‘interactive rating’

A

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

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6
Q

Identify 2 advantages of interactive rating.

A
  1. Fewer chances of error
  2. Without interactive ratings, an insurer may remain unrated (Or be given a public rating where insurer has less control over info used)
  3. Insurer has some control over information reviewed
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7
Q

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

A
  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
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8
Q

Briefly describe the 5 steps in interactive ratings by rating agencies

A
  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
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9
Q

Identify 3 examples where a high financial rating is particularly important

A
  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
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10
Q

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

A

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

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11
Q

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

A

Qualitative

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12
Q

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

A

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)

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13
Q

Describe Bests’ rating model: expected policy holder deficit

A

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

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14
Q

Describe Moody’s rating model: stochastic CF

A

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

Time Horizon:
Project cash flows until liabilities are settled

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15
Q

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

A

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

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

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