0chapter 5 insurance financial strength

7/28/2019 0Chapter 5 Insurance Financial Strength

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FINANCIAL STRENGTH

OF INSURANCECOMPANIES


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Why does an insurer pay a fee to an

outside Co. to state an opinion on its

financial strength?

Demonstrate to P holder that a third partys

opinion

Comparison between different insurersAllow an insurer with AAA to charge a higher

premium than a good BBB

Brokers and customers can decide

Insurance contract are simply buying a

promise, rating gives the strength to the

promise


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Four main rating agencies:

Standard and Poors (S&P)

AM Best

Moodys

Fitch

PACRA (Pakistani)


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CREDIT RATING

Credit rating is undertaken byindependent agencies who assess thecredit standing of long and short-term debtissued by companies, including insurers. A

credit rating comments on the capacity andwillingness of a debtor to pay itsobligations in full and on time, i.e. it is anopinion on the credit worthiness of a debtissue or issuer.

Agencies who look at the company fromthe investors point of view to help answerthe question will I lose all my money if Iinvest in this company.


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STRENGTH RATING

DEFINITIONS

When an insurer is given a financial strength

rating, this is the current opinion of the security

characteristic of an insurance organizations

ability to pay under its insurance policies andcontractual obligations, i. e. an evaluation of

the risk of default due to lack of funds.


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Insurance rating methodology

Assesses the financial strength of the company

and its capacity to meet obligations to policy

holders on the timely basis

Rating is assigned to the company

Examine the current financial position,

assessment of both quantitative and

qualitative factors, in-depth discussion withmanagement


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5 Areas of analysis

Industry review Understanding the industry as a whole

Level of competition

Barriers to entry and threats

Potential tale if losses, accurate pricing decision

Regulatory legal accounting framework

Operational review Focus on competitive strength, weaknesses, operating

strategies, business mix Underwriting expertise, distribution, capabilities, classes of

business, market share and growth, admin andtechnological capabilities


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Organizational review

Influence of owners and extent of financialsupport, creditability, market repo, experience inthe field

Management reviewAbility of management to establish a performance

based culture strategic region, apatite for risk,track record for meeting commitment, keyexecutives

Also includes enterprise risk management meansmethod by which company manages risk. ERMassess the frequency and severity of risk, riskmitigation, monitoring and reporting.

How insurer identifies, measures and managesrisk


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Financial review

Calculation of numerous financial ratio,

quantitative exercise, interpretation of the

users and weighing them into the final rating

Examine the financial and management report,company projection

Six main segments

Underwriting qualities Profitability Investment Re-ins utilization

Reserve & capital Liquidity


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1. Underwriting qualities

Underwriting measurement of performance

Two common ratio loss ratio & expense ratio

Evaluate U/w qualities growth in premium and

revenue i.e. changes due to pricing vs. growth inexposures, competitive and regulatoryenvironment

Claim management and expertise

Expense efficiencies, impact of cedingcommissions on expense ratio --- Combined ratio

Reasonably steady and even growth trends

Growth is evaluated as per market condition


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Sources of profit - Underwriting or investment

income

Operating revenue is premium exceed thelosses and expenses

Investment form is interest dividend, capital

gain

Calculation of Ratios are to determine

profitability ROA, ROE, etc.

Stability and growth pattern in underwriting

profits

2. Profitability


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Focus on credit risk, market risk, liquidity and

historical performance

Credit risk by looking at higher risk investment,

diversify Market risk asset evaluation due to a change in

market condition, interest rate

Investment results contribution to total earning Ability to manage cash flows and easily borrow

money

Investment yield, return, duration and maturity

structure

3. Investment / liquidity


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Used as defensive tool to lay off risk

Available when needed

Sufficient amount and type of reinsurancepurchased

Cost of purchasing reinsurance

excessive cessions simply to earn

commission add to risk

Financial strength of reinsurance

4. Reinsurance utilization


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5. Reserve And capital

adequacy

Adequate reserve imp for highly rated insurer

Review focus on historical track record for reserve

maintenance, reserve in targets and assumptions,

Comparisons of co. loss trends with ind. Evaluation of a solvency

Assess the level of capital with underwriting business

Ability to access internal and external capital resources Minimum capital requirement (MCR) Regulatory

requirement, - flat figure Base Capital Requirement

Enhanced Capital Requirement, individual capital

assessment


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Rating process

Insurance company needs the agency, signcontract

Analyst probe the senior managers to

understand the companys business Extensive questionnaire exchange

Recommendation by lead analyst to acommittee of analyst, debate the method and

reasoning Committee vote on the rating

Insurer accept or appeal, issuance of press

release


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INSURERS FINANCIAL STRENGTH RATING ARE DERIVED AAA extremely strong financial characteristics.

Exceptionally strong capacity to meet policy holders

and contract obligations. Risk level minimum. AA very strong financial security characteristics/ very

strong capacity to meet policyholder and contractobligations. Risk factors are modest

A strong financial security characteristics. Strongcapacity Risk factors are moderate

BBB good financial security characteristics. Goodcapacity risk factors are somewhat high

BB marginal financial security characteristics. Uncertaincapacityrisk factors are high

B weak financial security characteristics. Poor capacity risk factors are very high

CCC extremely weak financial security characteristics CC extremely weak financial security characteristics R experienced a regulatory action regarding involvency.

0chapter 5 insurance financial strength

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