Rating Agencies

Question 1

What two types of ratings to agencies provide?

Answer 1

1) credit ratings for corporate, municipal, and government bonds

2) financial strength ratings for insurers (life and P&C)

Question 2

Primary rating work (credit or financial strength?)
A.M. Best’s
Moody’s
S&P

Answer 2

A.M. Best’s - financial strength
Moody’s - credit
S&P - credit

Question 3

Why do insurance company’s require ratings from recognized rating agencies? (3)

Agents…

Answer 3

1) Agents are wary about unrated insurer

2) Agents may hesitate to place policies with the unrated insurers since they might be financially distressed

3) Agents might be sued for providing insurance from a financially weak insurer

Question 4

Identify the capital model used by the following agencies:
A.M. Best
Moody’s
S&P

Answer 4

A.M. Best
- uses the expected policyholder deficit method/ EPD method (Risk-based was given full mark for this question)

Moody’s
- use stochastic cash flows to model economic capital

S&P
- focuses on principles-based models/internal capital models and ERM practices

Question 5

How do rating agencies ensure consistent ratings across insurance companies?

Answer 5

• Issue ratings by committees independent from the ratings analyst
• Review ratings periodically
• Collect consistent information from companies and follow consistent guidelines in assessing
  the information

Question 6

Advantages and Disadvantages of choosing interactive rating:

Answer 6

Advantages
- Agents may be wary of insurers without an interactive rating
- Fewer chances of error

Disadvantage
- time-consuming
- expensive

Question 7

What is interactive rating?

Answer 7

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

Question 8

5 Steps of Interactive Rating
[RMPDP]

Answer 8

Research: by ratings analysts (insurer submits proprietary info)

Meeting: between rating analysts & insurer’s senior management for presentations

Proposal: the rating analyst leader proposes a rating (insurer may submit further info)

Decision: by ratings committee

Publication: to public & fee-paying subscribers

Question 9

High financial ratings are particularly important for certain types of businesses such as:

Answer 9

reinsurance: because if downgraded to below investment grade, a reinsurer may not be able to renew treaties

low freq / high sev lines: because it’s harder to assess risk and a high rating is a way of proving that insurer can pay claims (Ex: surety)

homeowners: because banks may require mortage insurance from a highly-rated insurer