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LI FE I NSURANCE RATI NG METHODOLOGY
CREDI T RATI NG AGENCY OF
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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 .
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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 .
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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 .
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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 .
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RATI NG PROCESS FLOW
Rating Frame Work
Analysis and Evaluation
Rating Committee Meeting
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Final Rating
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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
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FI NA L RATI NGFI NA L RATI NG
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L i fe I nsur ance Rat in g Met hodo log y
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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
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Mapping the score into CRABs Ratings i.e AAA to D.
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An Ex am ple- Var iab le Select ion Process
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An Ex am ple- Var iab le Select ion Process
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An Ex am ple- Var iab le Select ion Process
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An Ex am ple- Var iab le Select ion Process
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An Ex am ple- Var iab le Select ion Process
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An Ex am ple- Var iab le Select ion Process
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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 .
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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 .
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FACTOR: EARNI NGS STRENGTH A ND STABI LI TY
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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
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.
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 .
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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
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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
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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
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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
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Key I nd ica t ors
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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.
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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.
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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.
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S1
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Slide 2 4
S1 ?Shahrowardi, 5/16/2007
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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:
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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
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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
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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
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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
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Key Personnel Risk
Insider and Related Party Risk
Integrity of Accounting and Audit
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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
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Econom ic en vi r onm ent r isk
Pol icy ho lder s behav io r r isk
Reserv ing r isk
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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
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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
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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 .
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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
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