Feld.RtAgs Flashcards
Briefly explain the legislative response to criticism of rating agencies
Law now requires extensive DISCLOSURE of rating agencies' methods to help users understand ratings
Briefly explain the importance of Financial Strength ratings to buyers of insurance
- helps buyers a
ssess insurer's ability to pay claims - some buyers
MUST place business with highly ratedinsurers or reinsurers
Identify 3 measures taken by rating agencies to ensure consistency across insurers?
- Relate ratings to economic capital measures
- 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
Identify 2 shortcomings of Rating Agencies
-
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 claims BASED ON a comprehensive qualitative & quantitative analysis
Identify 2 advantages of interactive rating.
- Fewer chances of error
- Without interactive ratings, an insurer may remain unrated (Or be given a public rating where insurer has less control over info used)
- Insurer has some control over information reviewed
Identify 3 disadvantages of interactive ratings. (Hint = TIE)
- 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 analysts & 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 3 examples where a high financial rating is particularly important
- 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 (3)
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
In interactive meetings, is the focus on qualitative or quantitative info?
Qualitative
Identify Best, Moody and S&P rating or capital standard model
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
