FINANCIAL STRENGTH RATING AGENCIES

Question 1

SECT A: FINANCIAL STRENGTH RATING AGENCIES

BENEFITS TO INSURERS/BY LOB

Answer 1

1. Agents are wary of unrated insurers
2. Cost efficient – costly to do, but more efficient than demonstrating financial strength individually
3. Rating agencies are efficient at assessing financial strength
4. Insurers have some control over data reviewed by RA (in interactive ratings) – but deceptive, misleading or incomplete data may lead to poor ratings
5. Reinsurance
6. Insurers avoid credit risk
7. Reinsurers can charge more, decrease collateral/need for LOC
8. Homeowners – banks require HO insurance from insurers

Question 2

SECT A: FINANCIAL STRENGTH RATING AGENCIES

RATING AGENCY/FINANCIAL STRENGTH RATING VS RBC

Answer 2

1. Rating agencies start off with capital adequacy measure (ie RBC), which are then modified
2. RBC uses formulas; rating agencies also use stochastic economic capital models
3. RBC one model for all P&C companies; rating agency models differ between rating agencies
4. RBC quantitative; rating agency qualitative and quantitative

Question 3

SECT A: FINANCIAL STRENGTH RATING AGENCIES

“FINANCIAL RATING AGENCIES HAVE IMPLICIT REGULATORY POWER”

Answer 3

(+) insurers motivated to have high ratings in order to attract policyholders, so will adjust operations to ensure high rating
(+) some banks require HO to have insurance with a certain rating to get a mortgage => rating agency has implicit power in deciding which insurers qualify
(-) financial strength rating is not a requirement to do business
(-) rating agencies cannot intervene and take corrective action, so no real power over insurers
(-) insurance companies pay for rating agencies to perform financial strength rating, so possible for moral hazard for rating agency to give a rating higher than they deserve

Question 4

SECT A: FINANCIAL STRENGTH RATING AGENCIES

INTERACTIVE RATING VS PUBLIC RATING

Answer 4

Similarities
1. Both use public financial statement information
2. Both evaluate financial strength
3. Both assign a grade to insurer
Differences
1. Interactive – more costly & time consuming
2. Interactive – insurer presents proprietary data
3. Interactive – requires insurer participation