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  1. 2 types of ratings provided by agencies
    • credit ratings: corporate, municipal, and government bonds - S&P, Moody’s, Fitch
    • financial strength: life and P&C insurers - A.M. Best
  2. Benefits to insurers
    • reinsurer may need investment grade ratings to retain customers
    • independent agents use ratings to place policies with highest rated insurer
    • AA must consider ratings of reinsurers when evaluating uncollectible reinsurance
    • some jurisdictions require insurer to have an A- or better to write surety business
    • Statutory accounting values bonds rated BB or lower at market value
  3. Unrated and publicly rated insurers
    • agents hesitate to use unrated insurers
    • some banks don’t issue mortgages without property coverage from a rated insurer
    • public ratings (free) provide less control over information and greater chance of errors
  4. Benefits to policyholders
    • they depend on insurer’s financial strength but don’t have the expertise and resources
    • rating agencies can access proprietary information about operating strategy 
    • insurers are willing to pay $1M+ per year for ratings, sign of public acceptance
    • rating agencies don’t respond as quickly as the bond and stock markets
    • in contrast rating downgrades are slower - give time to verify information
  5. Rating process
    • background research by ratings analyst and submission of proprietary data by insurer
    • interactive meetings between rating analysts and senior managers of the insurer
    • preparation of rating proposal by lead analyst and submission of additional data
    • decision by rating committee (no permanent members) after presentation by the lead analyst
    • publication of rating on public website and analysis for fee-paying subscribers
  6. Effect of insurer strategy on ratings
    • rating agencies meets with insurer officers responsible for UW, reserving, reinsurance, financial reporting, investments, risk management, and major lines of business
    • business strategy & internal management are clues to resilience against adverse scenarios
    • analysts don’t focus on past decisions, but rather on quality of management: knowledge of industry trends, experience with adverse scenarios, handling of current problems
  7. Data provided by insurers
    • insurers decide the substance of their presentation and select the data they provide
    • rating analysts can question views, but generally don’t specifically ask for data
    • they analyze integrity, which can be tainted by deceptive, misleading or incomplete info
    • Schedule F doesn’t have reinsurance attachment points and limits
    • Schedule D doesn’t have derivatives details
    • Schedule P does not show segmented data used for reinsurance estimates
  8. 3 reasons why insurers are rated
    • agents are wary of unrated insurers, since they might be financially distressed
    • third-parties rely on outside assessments of insurer solvency
    • rating agencies are efficient in assessing financial strength
  9. Rating agencies capital requirements
    • business decisions used to be around surplus leverage ratios; now it’s about required capital to achieve desired rating from Best’s, S&P, Moody’s, or Fitch
    • all use data from Annual Statements, SEC filings, analyst meetings, and earning reports
    • however formulas differ greatly, producing salient differences in capital standards
  10. Types of models by agency
    • A.M. Best uses risk-based capital analysis (EPD to calibrate risk)
    • Moody’s and Fitch use stochastic capital models (cash flow) to model economic capital
    • Standard and Poor uses principle-based models and ERM practices (they assume insurers evaluate their capital need better than a rating agency can, so focus on ERM)
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