Magazine article Risk Management

Polishing S&P's Crystal Ball

Magazine article Risk Management

Polishing S&P's Crystal Ball

Article excerpt

Although the life/health insurance industry is in good financial condition, increasing price competition may be an early warning of future solvency problems, according to a quantitative new ratings system unveiled at a news conference by Standard & Poor's in late July. S&P replaced the solvency ratings it introduced four years ago with additional categories designed to provide a clearer picture of a company's solvency. We'll learn how the new system will affect property/casualty and reinsurance companies in early September.

Under the old system, the highest possible solvency rating--BBB--indicated an absence of potential financial problems. Companies with adequate and even superior solvency were lumped into the same category. The new system allows for greater differentiation. For example, under the new system, 90 companies have moved into higher A or AA ratings.

"We saw a need for more information about the degrees of strength," said Roy Taub, executive managing director of insurance ratings. "Most policyholders are interested in making sure their insurer is at least adequate, but some want extra layers of security. For certain insurance products like retirement plans, guaranteed investment contracts or structured settlements, people want an extra cushion of security."

The system also distinguishes the amount of detail used in preparing the analysis. A quantitative rating, which is based solely on insurance company filings with state regulators, is indicated with a lower-case "q" at the end of a company's rating. By comparison, claims-paying ability ratings include confidential financial data provided to S&P by insurance companies. On the ratings list, a company with an AA rating has provided S&P with detailed information, but a company with an AAq rating has not.

At the bottom of the solvency spectrum is another new category. The CCC rating (extremely vulnerable) was assigned to 21 companies, including the inappropriately named Reliable Life Insurance Co. in Louisiana. (Another Reliable Life Insurance Co., in Missouri, earned a BBBQ rating.) The CCC rating demonstrated its apparent validity fairly quickly. Steven Dreyer, director of quantitative ratings, said two of the 21 companies with a CCC rating--Supreme Life Insurance Co. in Illinois and Eagle Life Insurance Co. in Oklahoma--were grounded by regulators while the ratings list was still being printed.

Overall, Mr. Dreyer said the life/health industry's capital increased by 6 percent in 1994, but profits increased only 2 percent. Many companies tapped into surplus notes and surplus relief reinsurance for additional capital. Mr. Dreyer added that declining interest rates helped improve the liquidity of some companies by reducing defaults and credit risks in their bond portfolios. …

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