Feld.RtAgs

Question 1

legislative response to criticism of rating agencies

Answer 1

law now requires extensive disclosure 披露 of rating agencies’ methods to help users understand ratings

Question 2

importance of financial strength ratings to buyers of insurance

Answer 2

• helps buyers assess insurer’s ability to pay claims
• some buyers must place businesses with highly rated insurers or reinsurers

Question 3

how rating agencies ensure consistency across insurers?

Answer 3

consIStEncy
- Info gathering: be consistent in info gathering and assessment guidelines
- Separation: the analysis and final rating should be issued by separate bodies
- Economic capital: relate financial ratings to economic capital

Question 4

shortcomings of rating agencies

Answer 4

CRedibility…?
- Conflict of interest: rating agencies are paid by the companies they rate
- Reliability: rating agencies gave high ratings to companies that went bankrupt

Question 5

define interactive rating

Answer 5

an independent assessment of an insurer’s ability to pay claims based on a comprehensive qualitative and quantitative analysis

Question 6

2 advantages of interactive rating

Answer 6

• reliable
• if not rated, remains “unrated” or given a public rating where insurer has less control over info used

Question 7

3 disadvantages of interactive rating

Answer 7

(TIEs up company resources)
- Time consuming: requires extensive meetings with SM
- Intrusive: insurer must provide detailed operational info
- Expensive: insurer must pay for rating agencies to do interactive rating

Question 8

5 steps of interactive rating

Answer 8

RM-PDP (RAMPED interactive rating 要过一个坎)
- research: by rating analysts and insurer submits proprietary info 专有信息
- meetings: between rating analysts and insurer’s SM for presentations
- proposal: lead ratings analyst prepares proposal and insurer may submit further info
- decision: by ratings committee
- publication: to public and fee paying subscribers

Question 9

identify examples where a high financial rating is particularly important

Answer 9

LHR ( Low High Rating)
- Low freq/high sev lines: harder to assess risk, high rating to prove insurer can pay claims (surety)
- HO: banks may require mortgage insurance from a highly rated company
- Reinsurance: if downgraded, reinsurer may not be able to renew treaties

Question 10

why do insurers maintain credit ratings with rating agenceis?

Answer 10

(because they need to USE it)
- Unrated insurers: agents are wary警惕的 of unrated insurers
- Solvency assessment: 3rd parties rely on rating agency’s assessment
- Efficiency: agents, uws and regulators don’t have expertise to do their own rating

Question 11

are interactive meetings focus on qualitative or quantitative info?

Answer 11

qualitative

Question 12

identify Best, Moody, S&P rating or capital standard models

Answer 12

Best:
- EPD (Expected Policy Holder Deficit)
Moody’s :
- use stochastic cash flows to model economic capital
S&P:
- principle-based models and ERM practices (ERM)

Question 13

describe Best’s rating model

Answer 13

EPD = P/V = Expected PolicyHolder Deficit
P = pure premium for treaty
V = market value of reserves
choose required capital so that EPD = 1%

Question 14

describe Moody’s rating model

Answer 14

stochastic CF
method:
- model is based on repeated simulations of loss distributions of separate risks
time horizon:
- project cash flows until liabilities are settled

Question 15

describe S&P’s rating model:

Answer 15

principle based
method:
- evaluate insurer’s ERM & internal capital model
rating:
- weighted avg of S&P insurer capital assessment

Question 16

does S&P rating model incorporate financial risk measure or covariance measurement?

Answer 16

no

Question 17

what is S&P’s argument for using a weighted avg of its own formula and clients’ economic capital

Answer 17

well managed insurers evaluate their capital needs more accurately than a rating agency can