FELD.RTAGS Flashcards
legislative response to criticism of rating agencies
law now requires extensive DISCLOSURE of rating agencies’ methods to help users understand ratings
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 gave high ratings to companies that went bankrupt (Ex: Enron)
define ‘interactive rating’
an independent assessment of an insurer’s ability to pay clms BASED ON a comprehensive qualitative & quantitative analysis
interactive ratings - advantages (2)
- less expensive to pay for a rating than to demonstrate financial strength individually to others
- insurer has some control over the information reviewed
interactive ratings - disadvantages (3)
Time-consuming:
- requires extensive meetings with senior management
Intrusive:
- insurer must provide detailed operational info
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 ratings analysts + insurer submits proprietary info
MEETINGS: between rating analyts & insurer’s senior management for presentations
PROPOSAL: lead ratings analyst prepares proposal + insurer may submit further info
DECISION: by ratings committee
PUBLICATION: to public & fee-paying subscribers
identify examples where a high financial rating is particularly important (3)
reinsurance:
- if downgraded, a reinsurer may not be able to renew treaties
low-frequency / high-severity lines:
- harder to assess risk and a high rating proves insurer can pay claims
(Ex: surety insurance)
mortgage insurance:
- lenders may require mortgage insurance from a highly-rated company
why do insurers maintain credit ratings with rating agencies
UNRATED INSURERS: agents are wary of unrated insurers
SOLVENCY ASSESSMENT: 3rd parties rely on ratings
EFFICIENCY: rating agencies are efficient at assessing financial strength
interactive meetings: is focus on qualitative or quantitative info
qualitative
identify (Best, Moody, S&P) rating or capital standard models
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)
describe Bests’ rating model: expected policy holder deficit
Method:
EPD = $P / $V
$P = pure premium of treaty
$V = market value of reserves
SELECTION:
==> choose required capital so that EPD = 1%
describe Moody’s rating model: stochastic CF
Method:
- model is based on repeated simulations of loss distributions of separate risks
Time Horizon:
- project cash flows until liabilities are settled
describe S&P’s rating model: PB (principles-based)
Method:
- evaluate insurer’s ERM (Enterprise Risk Management) & internal capital model
Rating:
- weighted average of S&P & insurer capital assessment