Magazine article Risk Management

Casting Doubt on Ratings

Magazine article Risk Management

Casting Doubt on Ratings

Article excerpt

BY YEAR-END 1991, more than 200 insurers in the U.S. and London markets were in rehabilitation or liquidation, a figure that is expected to increase significantly this year, according to the International Policyholders Association, Inc. In fact, insurance industry experts predict that the continued economic recession combined with more stringent regulation at the state level may contribute to as many as 45 insolvencies in the United States over the next two years.

Due to this dire situation, public scrutiny has recently shifted from simply examining how officers of troubled insurers conduct business and fulfill their fiduciary duties, to determining the fairness and accuracy of insurer rating practices.

Because such rating agencies as A.M. Best Co., Standard & Poor's Corp., Moody's Investors Service Inc. and Duff & Phelps Credit Rating Co. failed to quickly downgrade the ratings of such troubled insurers as Executive Life Insurance Co. and Mutual Benefit Life Insurance Co., regulators at both the state and federal level are now analyzing those companies' rating procedures.

At a recent hearing of the House Subcommittee on Commerce, Consumer Protection and Competitiveness, Chairwoman Cardiss Collins, D-Ill., announced she will ask the General Accounting Office (GAO) to prepare a study detailing the practices of insurer rating agencies.

"With the public concerned about the solvency of insurance companies, consumers must be able to rely upon the accuracy and fairness of ratings in judging the financial strength of a company. Unfortunately, that has not been the case," she said.

According to Larry Cluff, assistant director of financial institutions and markets at the GAO, his department, "without many preconceptions," will "take a look at the comparability of the different rating agencies" and prepare a report in the next few months.

The federal insurance oversight proposal being drafted by Rep. John Dingell, D-Mich., has also been mentioned as a possible platform in which to scrutinize insurer rating agencies. According to a Dingell aide, only insurer solvency standards will be considered in the current draft. However, the draft does not necessarily preclude future consideration of the issue by Congress. "This is a moving process and we deal with issues as they arise," he says.

Scrutinizing the Process

"WE DO NOT MIND holding up our process to the scrutiny of federal regulators," says Larry Brossman, chief operating officer of the insurance rating division of Duff & Phelps. "However, we are a bit leery of federal regulation because of the bureaucracy it creates in its wake."

To reassure that the company has its own exacting standards, Mr. Brossman says that as a rater of securities, Duff & Phelps is subject to due diligence and a review of its methodology by the Securities and Exchange Commission.

"Fifty percent of the people in our company are chartered financial analysts or holders of other professional designations," he says, adding that increased integrity, knowledge and consistency brought uniformly to bear on the rating approach will ultimately benefit policyholders and insurance companies alike.

At the state level, the National Association of Insurance Commissioners (NAIC) recently published a "white paper" that described the methods and procedures of the various rating agencies, but stopped short of advocating any direct regulatory action. …

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