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Rating Agency View Of Capital Adequacy: Are They On The Mark?

This article discusses the role of rating agencies in assessing capital adequacy, exploring their limitations and potential impact on regulatory actions. It also provides a regulator's perspective on the Pennsylvania Insurance Department's experiences with rating agency analyses and their relationship to companies' financial health. The article emphasizes the need for better tools, such as actuarial opinions, reinsurance leverage, and dynamic measures, to assess capital adequacy.

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Rating Agency View Of Capital Adequacy: Are They On The Mark?

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  1. Rating Agency ViewOf Capital Adequacy:Are They On The Mark? Chet Szczepanski Chief Actuary Pennsylvania Insurance Department

  2. Rating Agencies: Cause or Effect?

  3. One Regulator’s Perspective • I come to praise A.M. Best, not to bury them! • Best performs a very valuable service. • Best’s Reports is one of the first things I look to when reviewing a company. • However …

  4. One Regulator’s Perspective • Best’s analyses are limited by the quality of the information which they receive. • They are subject to the representations of management, actuaries and other financial types.

  5. Critical Questions • Did rating agency downgrades prompt regulatory action? • Were companies in such bad shape to question whether rating agencies missed the mark?

  6. Pennsylvania Experience • PIC • Reliance • PHICO • Legion

  7. Pennsylvania Experience PIC: • Medical malpractice writer • Discounted reserves • Reserve deficiencies • Downgraded • Doctor’s did not care • RBC caught them!

  8. Pennsylvania Experience Reliance • Multi-line writer • Business is rating sensitive • Heavily leveraged by reinsurance • Heavily leveraged by holding company debt

  9. Pennsylvania Experience Reliance (continued) • Unicover • Reserve deficiencies • Downgraded • Liquidity, liquidity, liquidity

  10. Pennsylvania Experience PHICO • Medical malpractice writer • Rapid expansion into new markets • Reserve deficiencies • Downgraded • Doctors did not care • Liquidity not a problem

  11. Pennsylvania Experience • Legion • Multi-line writer • Business is rating sensitive • Heavily leveraged by reinsurance • Downgraded • Reserves? • Liquidity, liquidity, liquidity

  12. Pennsylvania Experience Common Themes: • Reserve deficiencies • Ratings downgrades • Reinsurance • Liquidity

  13. Rating Agencies • Cause or effect Most definitely both • Act too slowly Perhaps • Could they have acted more quickly Probably not at this time

  14. Rating Agencies Are the basic capital adequacy measures working? • Yes, but limited by • Quality of information and reliance • Static in nature

  15. Conclusions • We need better and sharper tools • Actuarial opinions and reports • Reinsurance leverage • Dynamic measures • Liquidity tests

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