William R. Berkley, who heads the insurance company that bears his name, blasted rating agencies and risk modelers recently, suggesting their efforts did not reward careful attention to underwriting.
Speaking at the National Council on Compensation Insurance annual symposium here, Mr. Berkley, W.R. Berkley's chairman and chief executive officer, also leveled criticism at insurers whom he said had accepted the situation and contributed to it.
Answering a question about the impact of rating agencies, he said they "don't like to apply judgments and respond to the pace of change." The world, Mr. Berkley said, is "moving at 90 miles per hour," and rating agencies at 12 miles per hour.
Noting the criticism that American International Group endured after announcing multibillion-dollar losses, Mr. Berkley said the situation had begun developing at the company six years ago, but rating agencies did nothing until the company announced them.
"Agencies should be proactive and helpful instead of piling on…They think within their box," he said.
Assessing the abilities of the staff at rating agencies, Mr. Berkley said 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 attributed what he perceived as a lack of rating agency talent to low pay and the fact that the best agency staff is lured away by insurers offering better salary. By hiring the agencies' best, "we're killing ourselves," he said.
The insurance executive also slammed rating agencies for their concept of how enterprise risk management should be employed at companies. Mr. Berkley said he had a "violent disagreement with rating agencies" over the issue of enterprise risk management.
While his company's focus on ERM was deemed satisfactory, Mr. Berkley said the rating agencies complained that he was too involved in the process. "I obsess, I ask questions…I want to know whether we have a problem. They think that's bad, it's too personal, it's not institutionalized."
In Mr. Berkley's view, ERM is "a starting point," and companies need to have people who make concerns over risk their major concern.
On the subject of models, Mr. Berkley said they played a key role in the subprime mortgage collapse. He said the Basel II International Convergence of Capital Management recommendations and support for models replaced the individual judgment of bankers and "made rating agencies gods."
If a security had a triple-A rating, "the risk became nonexistent" he said. The banks hired staff from rating firms who devised ways to fit securities into a credit box designed by the rating agencies, and "they never worried about the intrinsic risk" and simply passed it on to others, he said.
Mr. Berkley said that by using models, risk is being made to fit into boxes without a true understanding of the exposure. Insurers, he suggested, "are fooling ourselves," and he wondered if carriers comprehended "the impact of all of us using the same models?"
The unforeseen event, he warned, "is always outside the purview of the best models."
He advised that insurers in looking at risk "have to think, be informed, ask questions…Risk is not a constant. Our industry demands new models and individuals who think."
"Risk is not a constant. Our industry demands new models and individuals who think."
William R. Berkley, CEO, W.R. Berkley Corp.
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