Brace Yourselves
Having been a consultant for eight years before I became a reporter, I had to a make conscious effort when I started here to avoid doing what I used to get paid for giving my opinion on insurance issues.
Nine years later, my problem is reversed. It's painful for me to reprogram myself to do what I'm occasionally asked to do in this space offer opinions. So today, I'll slip back into my comfort zone and instead of delivering a view on some industry issue, I'll report some news you might have missed unless you were among 480 attendees at Standard & Poor's recent insurance conference.
For those who weren't particularly those on management teams of insurers brace yourselves. There's a change coming to the reviews performed by the New York-based firm. In no uncertain terms, S&P analysts repeatedly said they'll no longer base ratings on capital strength, competitive position and profitability. Now they're adding reviews of risk management processes to the mix.
I could tell by reactions at the meeting that a lot of our readers won't be thrilled. During a CEO panel, executives made it clear that even without this scrutiny of risk management, they were quite unhappy with the increasingly qualitative nature of reviews and would be quite satisfied with ratings that relied on capital strength.
Wall Street analysts were equally disturbed.
"What I worry about [when] I read rating agency reports [is the] real shift from what the companies and I can get my arms around to more qualitative factors," said Vanessa Wilson, analyst for Deutsche Bank. "It's wonderful to use holistic, robust views of the companies, but I need to understand what brings you to a conclusion that a company's risk management is inadequate."
"Is it because they don't have enough people doing it? Because they aren't meeting enough? What bothers you?" she asked, calling for transparency.
"There will be a whole new set of communications that will have to come out," conceded Mark Puccia, S&P managing director.
As for the need for risk management assessments, he said: "Some of this [need] ties into accounting. The more I look at how companies construct income statements and balance sheets, the more I realize that we're no longer talking about absolutes. It's an art."
"There are shades of grey," he said, highlighting disparate accounting views on revenue, expense and reserve items. "Maybe [if] welook at how companies manage their risks that will be a better arbiter," he concluded, referring several times to his frustration with insurers whose numbers are fine one day, yet "fall off a cliff" the next.
Speakers highlighted real roadblocks to management of insurance risks from the presence of illiquid balance sheet risks (like reinsurer credit) to the fact that sophisticated models can fail miserably. Skepticism then that rating firms can independently assess risk management effectiveness is clearly justified.
But at the end of the day, Mr. Puccia is right about the need for qualitative measures. Having looked at accounting numbers daily throughout my prior career, I know what an inexact barometer of financial strength they can be. (I had to sneak in one opinion.)
Bottom line: Whatever difficulties they pose, qualitative assessments are here to stay. And as White Mountains CFO David Foy said at one point about the growth of probabilistic risk models in the industry "I don't think you should necessarily gain comfort from that, because I think it needed to get there."
Susanne Sclafane
Managing Editor
Reproduced from National Underwriter Edition, July 22, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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