Section G Regulation of Insurance: Feldblum: Rating Agencies Flashcards

1
Q

List three agencies that produce credit ratings

A

S&P, Moody’s & Fitch

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2
Q

List an agency that produces Financial Strength Ratings for life and P/C insurers

A

AM Best

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3
Q

List three reasons why Financial Strength Ratings are important to insurers

A

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

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4
Q

Give two criticisms of the use of rating agencies

A

🔻 Recent downgrades of highly rated debt

🔻 Oligopolistic nature of rating agency industry

🔻 Greater efficiency of free markets in determining bond yields

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5
Q

Two reasons that unrated insurers can be at disadvantage

A

1️⃣ Independent agents may hesitate to use them

2️⃣ Banks require property insurance licensed insurer for mortgages

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6
Q

The Ratings Process focuses on quality of insurer’s managers and business strategy. List a few factors that it considers:

A

✨ 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

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7
Q

Five steps of an interactive rating

A

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

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8
Q

Three reasons public data insufficient for the Rating Agency analysis:

A

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

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9
Q

What types of data does the rating agency collect during the interactive meetings?

A

Underwriting, reserving, investment, and operating performance with supporting data

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10
Q

What happens if the insurer refuses an interactive meeting

A

Agency may issue a public rating using public information. Agency may issue public rating to inform others that past rating is no longer valid

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11
Q

Three reasons that an insurer with a rating from A.M. Best may request another rating from S&P, Moody’s or Fitch

A

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

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12
Q

Two broad categories of requests that agencies may make during the interactive meetings between ratings analysts and senior managers of the insurer:

A

1️⃣ High level requests

2️⃣ Insurer specific based on business written

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13
Q

List some examples of high level requests that the agencies may make during the interactive meetings

A

Business strategy, risk concentration guidelines, how information travels from management to employees

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14
Q

List some examples of the extensive background material that the agency requests from the insurer

A

🔸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

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15
Q

Three reasons that the insurer should not withhold damaging data that is not requested

A

1️⃣ Insurer loses credibility

2️⃣ Makes agency look bad to investors

3️⃣ May place insurer on ratings watch or lead to ratings downgrades

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16
Q

Briefly explain the top-down approach used by the Rating Agencies

A

✔️Start with economic and industry forecasts

✔️Go to insurer’s position within the industry

17
Q

Two reasons that the agencies are reluctant to change ratings too quickly

A

1️⃣ Erroneous downgrades anger clients

2️⃣ Erroneous upgrades ruin agency’s reputation

18
Q

Three reasons most insurers are rated

A

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

19
Q

List four lines of business where high ratings are important

A

1️⃣ Reinsurance

2️⃣ Surety

3️⃣ Homeowners

4️⃣ Structured settlements

20
Q

Briefly explain why high ratings are important for reinsurance

A

💼 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

21
Q

Briefly explain why high ratings are important for Surety

A

Principles may require construction firms obtain surety contracts from A rated insurers

22
Q

Briefly explain why high ratings are important for Homeowners

A

Banks require property insurance to issue mortgages. Due to risk of catastrophes in property, banks may require insurer has investment grade rating

23
Q

Briefly explain why high ratings are important for Structured Settlements

A

To protect claimants, courts may require A rated insurers

24
Q

List A.M. Best financial strength ratings

A

☑️ 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