Section G Regulation of Insurance: Feldblum: Rating Agencies Flashcards
List three agencies that produce credit ratings
S&P, Moody’s & Fitch
List an agency that produces Financial Strength Ratings for life and P/C insurers
AM Best
List three reasons why Financial Strength Ratings are important to insurers
1️⃣ Assess ability to pay claims
2️⃣ Reinsurers desire investment grade ratings to retrain business
3️⃣ Independent agents use to place customers with higher rated insurers
Give two criticisms of the use of rating agencies
🔻 Recent downgrades of highly rated debt
🔻 Oligopolistic nature of rating agency industry
🔻 Greater efficiency of free markets in determining bond yields
Two reasons that unrated insurers can be at disadvantage
1️⃣ Independent agents may hesitate to use them
2️⃣ Banks require property insurance licensed insurer for mortgages
The Ratings Process focuses on quality of insurer’s managers and business strategy. List a few factors that it considers:
✨ Knowledge of industry trends
✨ Experience with adverse scenarios
✨ Handling of current problems
✨ Doesn’t cover underwriting or investment decisions, as both can be distorted by random fluctuations
Five steps of an interactive rating
1️⃣ Background research by ratings and proprietary data submitted by insurer
2️⃣ Interactive meetings between ratings analyst and senior managers of the insurer
3️⃣ Preparation of ratings proposal by lead analyst and additional data submitted by insurer
4️⃣ Decision by the ratings committee after lead analyst presents proposal
5️⃣ Rating published
Three reasons public data insufficient for the Rating Agency analysis:
1️⃣ Investment schedules have little detail on derivatives
2️⃣ Reserve schedules may not show the same segmentation that the insurer uses
3️⃣ Reinsurance data doesn’t show attachment points/limits
What types of data does the rating agency collect during the interactive meetings?
Underwriting, reserving, investment, and operating performance with supporting data
What happens if the insurer refuses an interactive meeting
Agency may issue a public rating using public information. Agency may issue public rating to inform others that past rating is no longer valid
Three reasons that an insurer with a rating from A.M. Best may request another rating from S&P, Moody’s or Fitch
1️⃣ May want to issue debt through a holding company and wants rating from agency with more experience in debt ratings
2️⃣ Public company may want rating from agency better known to investors
3️⃣ May not like current rating and believes second will be better
Two broad categories of requests that agencies may make during the interactive meetings between ratings analysts and senior managers of the insurer:
1️⃣ High level requests
2️⃣ Insurer specific based on business written
List some examples of high level requests that the agencies may make during the interactive meetings
Business strategy, risk concentration guidelines, how information travels from management to employees
List some examples of the extensive background material that the agency requests from the insurer
🔸Statutory A.S. And GAAP financial statements
🔸History of company focusing on major events with biographies of senior executives
🔸Investment strategy and guidelines
🔸Organizational charts
🔸Product descriptions and business strategy by line
Three reasons that the insurer should not withhold damaging data that is not requested
1️⃣ Insurer loses credibility
2️⃣ Makes agency look bad to investors
3️⃣ May place insurer on ratings watch or lead to ratings downgrades
Briefly explain the top-down approach used by the Rating Agencies
✔️Start with economic and industry forecasts
✔️Go to insurer’s position within the industry
Two reasons that the agencies are reluctant to change ratings too quickly
1️⃣ Erroneous downgrades anger clients
2️⃣ Erroneous upgrades ruin agency’s reputation
Three reasons most insurers are rated
1️⃣ Agents are cautious of unrated insurers
2️⃣ Third-parties rely on outside assessments of insurer solvency
3️⃣ Rating agencies are efficient at assessing financial strength
List four lines of business where high ratings are important
1️⃣ Reinsurance
2️⃣ Surety
3️⃣ Homeowners
4️⃣ Structured settlements
Briefly explain why high ratings are important for reinsurance
💼 Many reinsurers are not licensed in the U.S.
💼 Often cover long-tailed, catastrophe, or other large claim risks
Therefore, Primary insurers need financially strong reinsurers.
💼 Also, strongly capitalized reinsurers can charge higher premiums
💼 Also, reinsurance treaties may specifically link ratings and security
Briefly explain why high ratings are important for Surety
Principles may require construction firms obtain surety contracts from A rated insurers
Briefly explain why high ratings are important for Homeowners
Banks require property insurance to issue mortgages. Due to risk of catastrophes in property, banks may require insurer has investment grade rating
Briefly explain why high ratings are important for Structured Settlements
To protect claimants, courts may require A rated insurers
List A.M. Best financial strength ratings
☑️ Secure
* Superior - A++, A+
* Excellent - A, A-
* Good - B++, B+
🛑 Vulnerable
* Fair - B, B-
* Marginal - C++, C+
* Weak - C, C-
* Poor - D
* Under Supervision - E
* In Liquidation- F
* Rating Suspended - S
