crab life insurance rating methodology

7/31/2019 CRAB Life Insurance Rating Methodology

1/36

LI FE I NSURANCE RATI NG METHODOLOGY

CREDI T RATI NG AGENCY OF


2/36

CRABS RATI NG PROCESS

d esig ned t o en su r e r el iab le, co nsist en t an d u nb iasedop in ions .

CRABs r at in g r ep r esen t s t he cu rr en t op in ion o f acom pany s f i n anc ia l s t r eng th and ab i l i t y to m ee t t he insu r e r sob l iga t ion t o po l i cy ho lde rs .

CRABs ra t in g i s no t a w a r ran t y o f an insu r e r s fu t u re ab i l i t yto m eet ob l iga t ions t o po l icy ho ld ers .

CRAB u n d e r t a ke s a n I n i t i a l Ra t i n g o f a n i n su re r b a se d o nt h e au di t ed an nu al r ep or t , act u ar ia l r ep or t s an d o t her

ava i lab le in f o r m a t ion .

2

As p a r t o f t h e i n fo rm a t i o n col l ec t i o n , CRAB p ro fe ss io n a l sho ld d i scuss ions w i th th e key m anagem en t pe rsonne l o f th eco m p a n y t o h a v e a cl ea r u n d er s t a n di n g o f t h e o p er a t i o n alp rocedure and s t ra t egy o f the o rgan iza t ion .


3/36

CRAB S RATI NG PROCESS (contd.)

CRAB exam ines th e na t u r e o f i nsu rance r egu la t ion and t hel i fe i nsu re r s pe r fo r m ance w i th rega rd t o th e com p l iance o ft h e v ar io us p r ov ision s o f t h e I n su r an ce Act 1 93 8, t h eI n su ran ce Ru les 1 95 8 an d t h e r ela t ed ci r cu lar s an dgu ide l ines i ssued by th e Depar t m en t o f I nsu rance f rom t im et o t im e, Com pan ies Act 19 94 and SEC Act .

Th e co m p et i t i v e p o si t i o n o f t h e l i f e i n su r e r i n r e la t i on t oo th e r l i f e insu re rs in t he indus t ry i s eva lua ted .

3

CRAB a l so e va lu a te s t h e com p e t i t i ve p o si t i o n o f t h e l i f einsu re rs w i th o th e r l i f e i nsu re rs in t he peer g r oup .


4/36

RATI NG PROCESS FLOW

Rating Frame Work

Analysis and Evaluation

Rating Committee Meeting

4

Final Rating


5/36

Rat in g Fr am ew or k

CRABs LI Dat aBaseCRABs LI Dat aBase CRABs LI Rat i os CRABs LI Rat i os

Rat in g ScaleRat in g Scale

Rat in g o f I nd iv idu a l L i fe I nsur anceRat in g of I nd iv idu a l L i fe I nsur ance

We i gh tW eigh t XX An aly sis Ou t pu tAnalys is Outpu t

WeightWeight XX Quantitative RatingQuantitative Rating

5

FI NA L RATI NGFI NA L RATI NG


6/36

L i fe I nsur ance Rat in g Met hodo log y

6


7/36

METHODOLOGY

accordance with CARAMELS Model.

Calculate Ratios

Observe Distribution pattern of industry ratios i.e throughtrend and cross section analysis

Statistically derive the scales for each ratio ( considering theglobal standard and country specific norms).

Fit the individual life insurance companys ratios into the model

Derive the model specific scores

7

Mapping the score into CRABs Ratings i.e AAA to D.


8/36

An Ex am ple- Var iab le Select ion Process

8


9/36


9


10/36


10


11/36


11


12/36


12


13/36


13


14/36

FACTOR: EARNI NGS STRENGTH A ND STABI LI TY

The excess o f l i fe fun d o f an insur er over t he ne t l iab i l i t y asva lued by t he actu a ry i s th e su r p lus genera ted as at ba lancesheet da te .

Th e su rp l u s a f t e r p ro v i s i on f o r t a xe s i s d i st r i b u te d a m o n g

recom m endat ion o f t he act uar y .

CRAB e xa m i n e s t h e t r e n d o f su rp l u s a s a t b a la n ce sh ee t

da tes and a lso du r in g th e in t e r va lua t ion pe r iods .

14

v i ab i l it y o f t h e i n su r er b y l oo k in g a t n u m e r ou s f i na nci alra t ios and o t her qua l i t a t iv e m easurem ent s .


15/36


16/36

FACTOR: EARNI NGS STRENGTH A ND STABI LI TY

16


17/36

FACTOR: LI QUI DI TY & ASSET LI ABI LI TY M AN AGEMENT

l i q u i d it y con s id era t i o n s a re n o t a s c r i t i cal a s w i t h n o n - l i f ebus iness.

Li qu id it y r i sk i s t h e ex p osu r e t o r i sk i n t h e ev en t t h atinsu f f i c ien t l i qu id asse ts w i l l b e ava i lab le f r om am ongs t th e

f l o w r e q u ir e m e n t s o f t h e p o li cy h o l de r s o b l ig a t i on s w h e nth ey are due .

I t w o u l d b e i n ap p r o p r i at e f o r t o o l ar g e a p r o p o r t i o n o f af u nd s asset s t o b e i nv est ed i n m ar k et a bl e an d i ll iq u i d

17

.

I t w ou ld a lso be dang erou s fo r t oo gr ea t a concent ra t ion inun quot ed assets w i t h v a lues w h ich ar e d i f f i cu l t t o ascer t a in .


18/36

LI QUI DI TY ( con t d.)

I n par t icu lar , CRAB exam ines t he f o l low ing :

L iqu ida t ion va lue a t r i sk

Capi t a l m ar ket r i sk

Com p l iance w i t h t he inv estm ent regu la t ion

18


19/36

FACTOR: CAPI TAL ADEQUACY

Capi t a l Ma in t enance Rat io ( CMR) = Cap i t a l Pos i t io n as % o fRegu la t o ry Requ i r ed Cap i t a l

Ca i ta l as % o f Asse ts

19


20/36

FACTOR: A SSET QUALI TY

Qua l i t y o f asse ts has to be o f exce l len t s tand ing to ensu reh igh r a te o f re t u rn on inves tm en t .

CRAB e va lu a te s ra te o f re tu r n o n e ach c l a ss o f a sset a n dt he r i sk associat ed w i t h each c lass.

CRAB cons ide rs th e fo l l ow ing fac to rs w h i l e ana lyz ing th easset qua l i ty

I nvest m ent St ra t egy

Dive rs i f i ca t ion Cred i t Risk

20

Business cred i t r i sk ( Po l icy ho lder Loan) I nv estm ent asse t c red i t r i sk Pol i t i ca l r i sk Sovere ign r isk


21/36


22/36

Key I nd ica t ors

22


23/36

FACTOR: ACTUARI AL VALUATI ON OFLI ABI LI TI ES

ec on o e n su r an ce c s p u a es a ev er yi nsu r er sh al l cau se an i nv est i gat i on t o b e m ad e b y anactu a ry in t o the f i nanc ia l cond i t i on o f a li f e i nsu re r .

CRAB d o e s n o t ca r r y o u t a c tu a r i a l va l u a t i o n o f l i a b i l i t i e s ;r a t h e r i t u s es t h e r e su l t s o f t h e v a lu a t i on m a d e b y t h e l i f einsu re rs ac tua ry .

Actu a ry s m anagem en t repo r t , i f ava i lab le , i s a l so used toe v al u at e t h e i n su r e r s c u r r e n t f i n an c ia l p o si t i o n a n d l ik e l y

scen ar ios t hat m ay em er ge u nd er d i f fer en t set o fassum pt ion s.

23

CRAB also r ev iew s t h e v alu at io n m et h od olo gy an dva lua t ion assum p t ions.


24/36

ACTUARI AL VALUA TI ON OF LI ABI LI TI ES ( co n t d .)

I n p a r t i cu l ar , CRA B r e v i ew s t h e f o l lo w i n g e le m e n t s o fva lua t ion :

Valua t ion Assum p t ions M o r ta l i t y Rate of I n t erestTh e p r op or t i on o f an n ual p r em i um s r eser v ed as ap r o v isi on f o r f u t u r e ex p en ses a nd p r o f i t s b ea r s t o t h et o t a l o f t he ann ua l p rem ium s.

24

S1


25/36

Slide 2 4

S1 ?Shahrowardi, 5/16/2007


26/36

FACTOR: MA NAGEMENT EVALUATI ON

Managem en t qua l i t y i s a ve ry im po r t an t fac to r , w h ich canm ake subst an t ia l d i f f e rence t o t he l i fe insur ers per fo r m ance.

CRAB ev a lua t es t he per f o r m ance o f t he m anagem ent t eamy o cu s n g o n p o cy a m n st r a t o n , ac tu a r a m a n ag e m e n t ,

da ta m anagem en t and com p l iance o f s ta tu to r y ob l iga t ions .Each of t he com pon ent s are su bdi v id ed as fo l low s:

25


27/36

MANAGEMENT ( cont d.)

o cy m n s r a on Meth od o f p r em ium co l lect ion Pol icy serv ic ing Claim s set t lem ent M a rke t i n g

Actuar ia l Managem ent Product des ign Reinsur ance po l icy Exp ense m on i t o r in g I nv estm ent po l i cy

26


28/36

MANAGEMENT ( cont d.)

a u o r y ga on s Au d i te d f i n a n cia l s ta te m e n ts ( b a lan ce sh ee t , r e ve n u eaccoun t e t c .) Actu a r ia l r epo r t s and abs t rac ts ( sum m a ry o f va lua t ionre p o r t s a s p e r re q u i re m e n t o f CRAB i f d e ta i le d r e p o r t i sno t m ade av ai lab le) Oth e r s ta tu to r y re p o r t s

Dat a Man agem ent Qual i ty o f m anagem ent in f o rm a t ion system Leve l and q ua l i t y o f com pu t e r i za t ion o f accoun t in g andva lua t ion da ta

27

Lev el an d q u al it y o f co m p u t er i zat i on o f b u si nessopera t ions


29/36

FACTOR : CORPORATE GOVERNANCE

Corpor a te Govern ance

Relationship between the BoD, Management andShareholders

Degree of relationship to balance effectively shareholders

Board Effectiveness

Board Independence

Ownership and Organizational Complexity Management Compensation

28

Key Personnel Risk

Insider and Related Party Risk

Integrity of Accounting and Audit


30/36

FACTOR : RI SK UN DERW RI TTEN

CRAB e xa m i n e s t h e n a tu re o f r i s ks u n d e rw r i t t e n b y a l i f einsu re r .

CRAB cons ide rs th e fo l l ow ing fac to rs w h i l e ana lys ing th ena tu re o f r i sks :

Pr ic ing o f I nsu rance Produ c ts

Underw r i t ing Risks

Underw r i t ing p r ocess r isk Clai m s r isk

29

Econom ic en vi r onm ent r isk

Pol icy ho lder s behav io r r isk

Reserv ing r isk


31/36

RI SK UNDERW RI TTEN ( con t d.)

Term s o f re insur ance ar ran gem ent

Cred i t w or t h in ess o f t he re - in surer

Net re ten t ion

30


32/36

31


33/36

FACTOR : MA RKET POSI TI ON AN D BRAN D

Com e t i t i v e A dv an t a es

Line of bus iness

Dis t r i bu t i on

32


34/36

FACTOR : SOLVENCY MARGI N

,i n su r er s v al u e o f asset s o v er t h e v al u e o f i t s l ia bi li t i es.Valua t ion o f i t s assets and l i ab i l i t i es p lays an im po r t an t ro lein t h e d et er m in at io n o f so lv en cy o f an in su r er . Ri skassoc ia ted w i t h reserv ing ar e a lso tak en in t o accoun t .

va lue o f assets over i t s va lue o f l iab i l i t ies .

Requ i r ed so lvency m arg in is t he r equ i r ed excess am oun t o fa n i n s u r e r s v a l u e o f a s s e t s o v e r i t s v a l u e o f l i a b i l i t i e s a sd e f in e d b y t h e re g u lato r y a u th o r i t y .

33

Solvency Rat io

St a tu t o ry Requ i r em ent o f So lvency Mar g in

CRABs Test o f Solv ency


35/36

34


36/36

35

crab life insurance rating methodology

Documents