Exec Says Raters Doing Solvency Regulation

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By Susanne Sclafane

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NU Online News Service, June 3, 12:39 a.m. EDT, NewYork?Rating agencies are doing more than just assigningletter grades indicating creditworthiness when they reviewcompanies in the insurance industry, according to one multilineinsurance company executive.

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"My sense is that the rating agencies are more intense insolvency and risk regulation than the insurance regulatory systemis," said Ramani Ayer, chairman and chief executive officer of TheHartford Financial Services Group. The insurance regulatory system,he said, "is more focused on rate and form" regulation.

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"The way I think about it" is that today "you have a dual systemof regulation," he said, speaking at yesterday's Standard &Poor's conference here.

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Unfortunately, Mr. Ayer said, while rating agencies are handlingmuch of the solvency portion of the dual system, each rating firmhas its own model of capital adequacy, complicating matters forinsurers. "Capital redundancy for one [rating organization] iscapital adequacy for another," Mr. Ayer said.

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At a later session, Dominic Frederico, president and chiefoperating officer of ACE Limited, blasted a particular component ofraters' capital adequacy models, noting that today's industrymodels are a factor of premiums, which give a measure of exposure,and reserves, used as a measure of existing liability.

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"Premiums are the worst barometer of risk," said Mr. Frederico,who is also chair of ACE INA and ACE Financial Services. He notedthat when insurers cut rates and expand terms and conditions, thepremium values they record are less; and capital adequacy modelsusing premium as a factor indicate that insurers need less capitalto support their business.

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"Exactly the opposite is true. I need more capital" in that softmarket situation, he said.

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Today, insurers are the beneficiaries of many factors thatshould support lower risk-based capital factors, he said. Butbecause premiums are up (as a result of rate hikes), even thoughlimits are shrinking and buyer retentions are moving up, the modelssay "I need to hold more capital. And that makes absolutely nosense," he said.

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As for the more general issue of rating agencies taking overwhere regulators have left off in the area of solvency monitoring,Mr. Ayer said, "I think it [would] be better if they focused moreon solvency" than on price and form, leaving the "very, verycompetitive" market to determine price.

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Maurice Greenberg, chairman of American International Group inNew York, agreed. "Let the market players set rates and form," Mr.Greenberg said. "Any states that have prior approval have thehighest rates, because companies pull out. They can't respond fastenough." It's not until the states deal with the problem, bypermitting more flexibility in pricing, that the market comes backin, he said.

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Mark Bachmann, managing director and global practice leader forthe financial services rating group within S&P, gave ascorecard of S&P rating actions at the start of the two-dayconference. He said that during the past two-and-a-half years,S&P has downgraded 237 insurance groups, while upgrading only55.

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Mr. Bachmann noted also that more than 40 percent of all theS&P ratings for insurance companies in North America carrynegative outlooks, and that 50 percent of European insurers'ratings carry negative outlooks.

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On the p-c side alone, during the past year, John Iten, adirector in S&P's North American insurance ratings practice,said that 30 groups were downgraded and there were no upgrades.Thirteen of the 30 downgrades pushed ratings two or more notchesdown on S&P's rating scale, he said.

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