FELD.RTAGS

Question 1

legislative response to criticism of rating agencies

Answer 1

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

Question 2

how rating agencies ensure consistency across insurers (3)

Answer 2

INFO-GATHERING: be consistent in (info-gathering, assessment guidelines)

ECONOMIC CAPITAL: relate financial ratings to economic capital

SEPARATION: the analysis & final rating should be issued by separate bodies

Question 3

shortcomings of Rating Agencies (2)

Answer 3

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)

Question 4

define ‘interactive rating’

Answer 4

an independent assessment of an insurer’s ability to pay clms BASED ON a comprehensive qualitative & quantitative analysis

Question 5

interactive ratings - advantages (2)

Answer 5

• less expensive to pay for a rating than to demonstrate financial strength individually to others
• insurer has some control over the information reviewed

Question 6

interactive ratings - disadvantages (3)

Answer 6

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

Question 7

briefly describe the 5 steps in interactive ratings by rating agencies

Answer 7

RESEARCH: by ratings analysts + insurer submits proprietary info
MEETINGS: between rating analyts & 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

Question 8

identify examples where a high financial rating is particularly important (3)

Answer 8

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

Question 9

why do insurers maintain credit ratings with rating agencies

Answer 9

UNRATED INSURERS: agents are wary of unrated insurers
SOLVENCY ASSESSMENT: 3rd parties rely on ratings
EFFICIENCY: rating agencies are efficient at assessing financial strength

Question 10

interactive meetings: is focus on qualitative or quantitative info

Answer 10

qualitative

Question 11

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

Answer 11

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)

Question 12

describe Bests’ rating model: expected policy holder deficit

Answer 12

Method:
EPD = $P / $V
$P = pure premium of treaty
$V = market value of reserves
SELECTION:
==> choose required capital so that EPD = 1%

Question 13

describe Moody’s rating model: stochastic CF

Answer 13

Method:
- model is based on repeated simulations of loss distributions of separate risks
Time Horizon:
- project cash flows until liabilities are settled

Question 14

describe S&P’s rating model: PB (principles-based)

Answer 14

Method:
- evaluate insurer’s ERM (Enterprise Risk Management) & internal capital model
Rating:
- weighted average of S&P & insurer capital assessment