SCOTTSDALE, Ariz.–The Illinois state insurance regulator attacked rating agencies as having undue influence yesterday during a session at a national conference of insurance and reinsurance carriers.

Illinois Insurance Director Michael McRaith made his comments during a panel on “The Impact of Risk Models and Rating Agencies,” presented at the annual meeting here of the Property Casualty Insurers Association of America (PCI).

“We need to change the prominence of rating agencies,” according to Mr. McRaith, who mentioned that one insurer–which he did not identify by name–had been “thrown into runoff by an unwarranted downgrade.”

However, rating firm representatives responded that they filled a need and did not impose their services.

Anthony Diodato, group vice president of A.M. Best Company's property-casualty division, said there is a need for what the rating firms do, and pointed out they do not venture opinions that are not solicited by companies.

Damien Magarelli, a director with Standard & Poor's Financial Services Ratings Group, said if one examined the track record of agencies after major events such as 9/11 and Hurricane Katrina, “you've not seen major re-ratings.”

The track record of rating agencies is good, he said, adding that they have performed well over time.

Mr. McRaith, however, said he expects the National Association of Insurance Commissioners will move ahead with a proposal to create its own independent rating agency.

He suggested an independent understanding of an insurance company is needed and an objective standard used before a firm is put in a situation where it goes into receivership.

Steve Monahan, president and chief operating officer of Auto Club Group, said that what rating agencies seek to learn is what a company is doing to enhance its financial strength–the kind of inspection that the company itself can be performing,

“It's a big deal to be downgraded,” he remarked.

Mr. Diodato said that if rating firms see a trend that will weaken a company's financial strength or claims-paying ability, it is their obligation to take action.

The panel's moderator, Regis Coccia, editor of Business Insurance, asked whether regulators and rating firms are acting quickly enough for present conditions.

Mr. McRaith said state insurance regulators have been very engaged and responsive, adding that in a couple of areas they looking at an enhancement of regulations.

Mr. Diodato said the rating firms are in a no-win situation because if they act methodically they are accused of being too slow, but if they are too quick, they are called “irrational.”

What Best does, he explained, is to try and react in a prudent manner.

Mr. Magarelli said S&P is looking one year out and attempting to be prospective in their ratings.

Asked if the firm reacts to an insurer's stock price, Mr. Magarelli said S&P does not, but “we have to pay attention to it” and gauge whether changes are in line with the marketplace, and whether a company has the ability to pay claims.

Responding to an audience question as to whether they speak with insurance companies' bankers and portfolio managers and company directors, Mr. Diodato said that companies can bring whomever they wish to a meeting with the rating firm.

He said his firm does not pay attention to equity analysts, because Best gets the same information but looks at different parameters.

Mr. Magarelli said his firm will investigate stock analyst reports to see whether they have merit, and lately is spending much more time with boards of directors.

Discussing underwriting models, the panel generally agreed that they should act as a guide and should not substitute for good underwriting work.

Roosevelt Mosly, a principal and consultant with Pinnacle Actuarial Resources Inc., noted that models try to represent reality with equations, and can be helpful but won't provide all the answers.

The two rating firm representatives said there was no requirement firms have a model, and those that did not have them would not be penalized.

Mr. Mosly said that putting model information to work can be time consuming and costly for companies.

Special Reports /

Rating Agencies Come Under Fire From Regulator

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