Bill Berkley is the Simon Cowell of insurance. He always speaks his mind, with no sugarcoating, and lets the chips fall where they may. He was back on his soapbox last week in Orlando at the National Council on Compensation Insurance annual symposium, where he lobbed more verbal grenades at rating agencies.
As reported by our own Dan Hays (click here for the full story), Mr. Berkley–W.R. Berkleys chairman and chief executive officer–hammered rating agencies for failing to keep up with what's important in today's market, charging that while the insurance world is moving at 90 miles per hour, rating agencies were lagging behind at 12 mph.
Citing, for example, the beating AIG took after recently announcing multi-billion dollar losses, Mr. Berkley said problems began developing at the iconic company six years ago, but rating agencies did nothing until the carrier announced them.
Agencies should be proactive and helpful instead of piling onThey think within their box, he said.
Mr. Berkley also lambasted what he characterized as a shortage of talent at the rating agencies, insisting he would not want to hire one of the analysts assigned to rate his firm for the third level down in my accounting staff.
Mr. Berkley blamed part of the problem on low pay, charging that the best agency staff is being stolen by insurers offering a better salary–a development that he said ultimately comes back to haunt carriers. By hiring the best and the brightest at the rating agencies, were killing ourselves, he contends.
He also noted that he's had a violent disagreement" with rating agencies over how enterprise risk management should be implemented at companies.
This isn't the first time Mr. Berkley has slammed rating agencies. Back when I started this blog in the fall of 2006, he filed similar complaints during his talk at the annual Property-Casualty Executive Conference, run by National Underwriter Company. On my blog of Nov. 17, 2006, I filed the following observation:
"While conceding that the agencies mean well and are doing a 'much improved job,' Mr. Berkley said "it is astonishing how little insight they have into underwriting risk. If you don't fit in one of their boxes, they think they have the right to tell you how to run your business. But you can't run your business just to fit into the boxes they want you to check. The only reason they do it that way is that they lack the skilled people to take a broader view."
He wasn't alone that day in his criticism. Dan Carmichael–at the time president and CEO of Ohio Casualty Corp., before its acquisition by Liberty Mutual–added that "our biggest frustration [with rating agencies] is seeing more turnover than at McDonalds. As soon as we train [an analyst] about our business, they're gone. It's hard to get inexperienced analysts to see us as individuals and how we're different from the standard models."
More recently, just a few weeks ago South Carolinas insurance director, Scott Richardson, pulled no punches when he walked into the lion's den–a Standard & Poors Insurance-Linked Securities Conference–to complain that "rating agencies have created a huge problem for regulators."
He said their demands on carriers to account for catastrophe exposures was putting extreme pressure on state insurance commissioners to approve higher rate hikes than may really be necessary. (Click here for the full story by our own Susanne Sclafane.)
Still, you don't hear much criticism of rating agencies from the industry. That's no surprise, since most carriers are in no hurry to anger those whose could create tremendous problems for them in the market with a simple downgrade.
It's a little like a baseball player arguing with the umpire after a called third strike–you get your point across, but if you show up the person calling the game, you run the risk of seeing your strike zone widen considerably in your next at bat. If the ball doesn't hit you, it's a strike–know what I mean?
Of course, there are those who believe that if you let the umpire know you won't accept bad calls, you might intimidate him enough to get a better call down the road in a crucial situation.
Mr. Berkley obviously is from the latter school of thought. Whether his "constructive criticism" will ultimately benefit or harm his case down the road remains to be seen. But the questions his critique raised remain. Among them:
Are rating agencies doing an adequate job assuring insurer solvency while letting underwriters do their job?
Has the recent emphasis on enterprise risk management helped or hindered the process of determining whether insurers are up to the liabilities they face?
Has modeling become too influential in determining underwriting behavior in an effort to appease rating agencies looking for quantitative proof that carriers have their catastrophe risks under control?
Have the rating agencies usurped the role that should be played by state regulators?
Should rating agencies themselves be regulated?
Are consumers better off these days under the new criteria laid down by the rating agencies?
What do you folks think??? (If you fear showing up the umpire, feel free to respond anonymously.)
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