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CAS Annual Meeting Rating Agencies

CAS Annual Meeting Rating Agencies. Matthew C. Mosher, FCAS, MAAA Group Vice President Property/Casualty Ratings November 15, 2005. Discussion Topics. Capitalization’s Role in Rating Analysis Risk Management’s Role in Rating Analysis Role of Other Models in the Rating Process

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CAS Annual Meeting Rating Agencies

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  1. CAS Annual MeetingRating Agencies Matthew C. Mosher, FCAS, MAAA Group Vice President Property/Casualty Ratings November 15, 2005

  2. Discussion Topics • Capitalization’s Role in Rating Analysis • Risk Management’s Role in Rating Analysis • Role of Other Models in the Rating Process • Challenges • Overview of Current Model (BCAR) • Summary

  3. Capitalization’s Role in Rating Analysis • Rating Analysis is Far More than Just Running Models • Very Important, but Importance Varies Depending On: • Stability of Operating Performance • Level of Operating Performance • Shock Loss Exposure • Market Conditions • Business Profile • General Risk Management Practices • Focus is on the Correct Level of Capital to Appropriately Minimize Risk for a Rating Level • No Penalty for Holding Additional Capital • Capitalization Alone is Not Enough to Achieve Highest Rating Levels

  4. Risk Management’s Role in Rating Analysis • In Aggregate, the Most Important Issue • Ability to Monitor Risk Aggregation • Use of Information in Company Strategy • Emphasis on Risk Management • Consideration for Correlation of Risks • Risk-Adjusted Capitalization • Risk Management is Necessary to Achieve Highest Rating Levels

  5. Role of Other Models in the Rating Process • Always Willing to Consider External Models • Quality of the Model and Assumptions Determine the Impact on the Rating • Key Issues to Review: • Level of Security Targeted • Time Frame of Security • Assumptions with in the Model • Correlation • Independence – Expected LR or Indicated LR • Calibration of Reserve Variability and Pricing Variability • Underwriting Cycle • Economic Model

  6. Modeling Challenges • Consistency of the Evaluation • Source/Amount of the Data • Complexity vs. Simplicity/Understanding • Integration of Businesses • Importance of Assumptions

  7. BCAR Considerations: Assets • Credit Quality Assets • Market Risk • Diversity of Assets • Dependence on Reinsurance • Liquidity • Capital Structure

  8. BCAR Considerations: Underwriting • Amount and Type of Business Written • Profitability of Business • Market Conditions by Line • Growth Rate, Depending on Market • Adequacy of Loss Reserves • Payout Pattern of Losses • Stability of Loss Development Pattern • Gross and Net Catastrophe Exposure • Size of the Company and Resources Available • Impact of Reinsurance and Level of Risk Transfer

  9. Frequently Made Adjustments • Reserve Adequacy (Core & A&E) • Reinsurance Charges • Catastrophe Exposure • Affiliated Charges • Stop Loss Reinsurance • Reinsurance Terms • Loss Sensitive Business • Source of Business Growth • Projected Capitalization

  10. Summary • Models are only Tools • Use of Models and Overall Risk Management is Key • Comfortable but Not Satisfied with Current Model • Evolving Issues and Tools Require Improvement • Key Focus Areas: • Investments • Correlation • Integration of Business Segments • Calibration

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