Security Ratings : Does The Industry Need Them

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Security Ratings Does The Industry Need Them?

• Chris Dinwoodie
• Director of Marketing
• Standard Poors Insurance Ratings
• Insurance Institute of London
• 11th January 2000

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Today

• How did the ratings business begin?
• What types of insurance rating are there?
• How are ratings used?
• Does the Industry need them?

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Standard Poor's Rating Network

• In business since 1860
• Rating bonds since 1916
• 1400 employees
• 200 people in Europe
• 18 offices worldwide,6 in Europe
• A division of the McGraw Hill Companies
• "An investors right to know" Henry Varnum Poor
  1863

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Standard Poor's Ratings Network
Offices Boston (1994) Chicago (1994) Dallas
(1996) Frankfurt (1992) Hong Kong (1994) London
(1984) Madrid (1992) Melbourne (1990) Mexico City
(1993) Milan (1999) Moscow (1998) New York
(1860) Paris (1990) San Francisco
(1990) Singapore (1996) Tokyo (1985) Toronto
(1993) Washington (1994)
Affiliates/Ventures Argentina (1995) Brazil
(1997) Chile (1996) India (1996) Indonesia
(1996) Moscow (1998) South Africa (1997) Taiwan
(1987)
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Types of Insurance Rating

• Standard Poor's has two analytical methods by
  which Insurer Financial Strength Ratings are
  prepared,distinguished by the amount and type of
  information presented to the process
• 1 Interactive Method
• This is an interactive, intensive method
• 2 Public Information Method
• Relying solely upon public information

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Definition

• Standard Poor's opinion of an insurance or
• reinsurance company's financial capacity to meet
  the
• obligation of its insurance or reinsurance
  policies in
• accordance with their terms

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Standard Poor's Financial Strength Rating
Definitions

• AAA Extremely strong
• AA Very strong
• A Strong
• BBB Good
• BB Marginal
• B Weak
• Ratings based on public information carry the
  relevant subscript 'pi'

Financial security characteristics that
outweigh vulnerabilities
Vulnerable characteristics that may
outweigh strengths
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Default Rates Over Time by Rating Category
Average Cumulative 10 -Year Default Rates ()
1987-1997

• That is by 1997, 42.72 of entities rated CCC
  in 1987 had defaulted
• Note the difference between BBB and BB

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Demand for Ratings growswhy?

• Reduces complexity of Buying Decision
• Vulnerable Insurers remain
• Independence, Integrity and Objectivity are rare
  Values
• Role as a Market Gatekeeper
• Regulatory/Supervisory trends
• Brokers,Banks,Carriers, and vested interest
• Brokers Security Department role evolves
• Debt market instruments more commonplace
• Growth of the Information-based economy

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How are Ratings Used?

• In Information Products- to assess counterparty
  credit risk
• As a marketing tool- by the companies themselves
• By us- to support wider articles and opinions
• As the foundation for debt ratings
• To access new markets, by adding credibility
• As an aid to transparency
• Internal benchmarking and performance measurement

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The devil is in the detail.

• The Business Issue. Who pays for it all?
• Informed observers, not consultants
• Transferring from pi to Interactive approach
• Who owns the rating? Opinion and content.
• The credit cliff
• That BBB rating.
• Notations Sauvages

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So- does The Industry need them?

• Which Industry?
• Banks
• Brokers
• Insurers
• Other Counterparties
• Wrong credit views.
• Judging by their own record- yes
• And we need more analysts.

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Applications in a sealed envelope, please.