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Observing the industry landscape Ratings organizations, research and consulting firms benefit insurers, agencies, capital markets and regulators By Phil Zinkewicz Insurance rating organizations are at the very heart of the insurance industry’s credibility—credibility with individual and institutional investors, policyholders, regulators and legislators. Organizations such as A.M. Best, Standard & Poor’s, Moody’s and TheStreet.Com, Inc., are among the “observers” of the insurance industry. They keep a watchful eye on how insurance companies perform, as well as on issues that might affect a company’s performance. In addition, there are insurance industry research and consulting firms, such as Conning and Tillinghast, that, although they do not provide ratings, also observe the industry and conduct studies on insurance industry issues. Rough Notes spoke with some of these organizations to determine what it is that they “bring to the table” in terms of their involvement in the insurance industry. We asked how the industry benefits from these “observers’” operations. Tom Upton, managing director for Insurance Ratings Services at S&P, says that the values a good ratings organization brings to insurers, their customers, capital markets and regulators are multiple. “Of course, the ratings we apply to insurance companies are of assistance to those insurers in terms of marketing their products. Insurers with good ratings can advertise those ratings to attract new business. This is extremely important with start-up companies where their brand is not well known. The ratings also give insurers some insight as to how their companies are performing versus other insurers. Along with the ratings, we offer useful criticism and commentary on particular issues that might affect the insurer being rated.” Upton says that S&P also offers studies and research papers on major issues of the day and how they might impact the industry in the longer term. “This is not only of value to insurers, but also to the investment community,” says Upton. “Our studies and research papers assist capital markets in making sound investment decisions. We choose what issues are important to write about by monitoring the insurance marketplace, with all its new products, market shifts and regulatory pressures. We write about what is happening, but we also try to anticipate developments further down the road. We get valuable feedback from institutional investors who very often will ask us to elaborate on a particular subject. Moreover, if I were a regulator or a consumer, S&P’s ratings and research papers would provide an excellent way to keep abreast of what’s driving the insurance industry.” A.M. Best, in the introduction to its 2006 edition of Best’s Insurance Reports®, says its “Mission Statement is: ‘To perform a constructive and objective role in serving the insurance marketplace as a source of reliable information and ratings dedicated to encouraging a financially strong industry through the prevention and detection of insurer insolvency.’ We believe that this proactive role is vital to encourage prudent management of insurance companies and to improve the industry’s financial strength for the benefit of policyholders.” A.M. Best goes on to say that its “ratings and related financial information provide powerful tools for insurance decision-making and market research for insurance agents, brokers, risk managers, pension managers, employee benefits administrators, investment bankers, insurance executives, policyholders and consumers.” Moody’s Investors Service is among the world’s most respected and widely utilized sources for credit ratings, research and risk analysis. In addition to its core ratings business, Moody’s publishes market-leading credit opinions, deal research and commentary, serving more than 9,000 customer accounts at some 2,400 institutions around the globe. Moody’s provided Rough Notes with its recently published global rating methodology for property and casualty insurers. According to the report, Moody’s rates just over 400 property and casualty insurance companies, with approximately $100 billion of rated securities and more than $500 billion of insurance reserve liabilities as of December 31, 2005. Moody’s approach to rating the various obligations of property and casualty insurance organizations is rooted in an assessment of the financial strength of the main operating units within that organization, the report goes on to say. In rating property and casualty insurers on a stand-alone basis, Moody’s focuses on both qualitative and quantitative characteristics in the following areas: business profile—market position, brand and distribution, product risk and diversification; and financial profile—asset quality, capital adequacy, profitability, reserve adequacy and financial flexibility. Other considerations in determining stand-alone ratings include: management, governance, risk management, accounting policy and disclosure, regulatory environment, and regional considerations, among other things. But, again, as with S&P, ratings are only a part of what Moody’s offers to the property and casualty insurance industry. Moody’s also publishes investor-oriented credit research, including in-depth research on major debt issuers, industry studies, special comments and credit opinion handbooks. While research, analysis and data are delivered through a number of channels, most of Moody’s clients use the firm’s Web site for access to such services in a real-time environment. Yet another organization that provides ratings for the property and casualty insurance industry is the former Weiss Ratings, which was established in 1988. However, in August of last year, Weiss was acquired by TheStreet.com, Inc., a leading provider of financial commentary, analysis and news. The new company is called TheStreet.com Ratings, Inc. Melissa Gannon, vice president, insurance and bank ratings for TheStreet.com Ratings, says that, unlike other ratings organizations, the firm rates the financial strength of some 2,400 insurance companies by examining their statutory financial statements filed with the National Association of Insurance Commissioners. “We take a quantitative, objective approach to rating insurers,” says Gannon. “We don’t meet with insurance company executives or make any other type of subjective judgment. When we measure the financial strength of a company, we look at the numbers. As for industry studies, we don’t publish them on a regular basis for general consumption. Rather, we will conduct research and do studies on a customized basis at the request of a client.” These ratings organizations and others like them do more than just provide statistical information about the insurance industry and to the insurance industry. Very often, they influence insurance company behavior. For example, a recent survey of life insurance company CFOs conducted by Tillinghast, a unit of Towers Perrin, showed that insurance companies are increasingly “raising the bar” for enterprise risk management (ERM). What’s interesting about the survey, however, is that this development is attributed to greater scrutiny by rating agencies. “All major rating agencies have stepped up efforts to incorporate ERM into their overall assessment of companies’ financial strength,” according to Prakash Shrimpi, practice leader with global responsibility for ERM at Tillinghast. “This trend is likely to increase as rating agencies refine their demands for insurance companies, and raise expectations for how companies manage risk. We’re seeing a pronounced shift with risk management—from a technical task, which merely identifies and quantifies risks—to a holistic process that drives business strategy. Insurers are feeling pressure internally and externally to extend ERM programs beyond regulatory compliance and control to a critical piece of the business planning process to help increase shareholder value and impact rating agency evaluations.” So, according to that survey, rating agencies do affect insurance company corporate decision-making. Interestingly, that survey comes from Tillinghast, not a rating agency itself, but certainly one of the “observers” of the insurance industry. The Tillinghast business of Towers Perrin provides consulting and software solutions to insurance and financial services companies and advises other organizations on risk financing and self-insurance. “We help our clients improve business performance in areas related to their financial, risk, product distribution and capital issues,” says Jeanne Hollister, Tillinghast’s North America property and casualty insurance practice leader. As an observer of the insurance industry, we have a broad perspective, global as well as cross sector. We look at broad trends in the industry and assist insurers in addressing the challenges and exploiting opportunities as well. We work with so many companies that, often, we can see problems that individual companies can’t see on their own.” Hollister says that Tillinghast researchers work together to determine the key issues of the day that will impact its clients in particular and the industry overall. “We set up research agendas,” she says, “but we are also able to respond quickly when an unexpected development occurs. This was true after 9/11, when we worked rapidly to put together our perspective on how that horrific event was going to impact the insurance industry. We received some very favorable responses to that overview. We did the same thing after Hurricane Katrina, where there was a similar need for a quick response.” Acting in a vein similar to Tillinghast, Conning Research & Consulting is yet another observer of the insurance industry. Stephan Christiansen, managing director, describes Conning’s work this way: “Overall, we bring a view of trends and changes in the insurance industry to our clients, providing them with information and insights that they might not have because they are too close to a particular situation. For example, there’s a lot of talk in the insurance industry these days about ERM and the challenges that concept is bringing. Our published materials are intended to help individual insurers understand ERM from their own points of view but also from a broader perspective.” Christiansen says that Conning Research & Consulting produces publications in three areas. “First, we provide forecasting material for each of the major industry segments. That forecasting is done on a line of business basis—workers compensation, general liability, professional liability, etc. We also examine the impact of investment income on company performance, premium growth and capital requirements. Second, every six months we report on what’s going on across the industry in terms of key regulatory changes, competition, etc. Third, we do strategic studies on emerging issues and trends that have broader implications. These are more forward looking reports that might scan a three- to five-year period. For example, we recently completed a piece on the next phase of banks in insurance,” says Christiansen. These are some of the things, then, that “observers” of the insurance industry are bringing to the table. Insurers can either feast on their offerings and grow fat, or restrict their diets and take the consequences. * |
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