Best's Guide to understanding the insurance Industry

< Previous48 CHAPTER 5: REINSURANCE/ART 48 Sidecars: Separate, limited-purpose companies, generally formed and funded by investors XVXDOO\KHGJHIXQGVWKDWZRUNLQWDQGHPZLWKLQVXUDQFHFRPSDQLHV7KHUHLQVXUDQFH VLGHFDUSXUFKDVHVFHUWDLQLQVXUDQFHSROLFLHVIURPDQLQVXUHUDQGVKDUHVLQWKHSUR¿WVDQG risks. It is a way for an insurer to share risk. If the policies have low claim rates while in possession of the sidecar, the investors will make higher returns. Surplus Notes and Insurance Trust-Preferred CDOs: Surplus notes and trust-preferred CDOs (collateralized debt obligations) provide another funding source for small and PLGVL]HLQVXUDQFHFRPSDQLHVWKDW¿QGLWFRVWO\WRLVVXHFDSLWDORQWKHLURZQ7KHVH companies can access the capital markets through the use of the surplus notes/insurance trust-preferred pools. Securities in these pools are issued by a stand-alone SPV and sold to LQYHVWRUV7KHSURFHHGVRIWKHQRWHVDUHXVHGWRSXUFKDVHWKHWUDQVDFWLRQ¶VFROODWHUDOZKLFK consists of surplus notes and insurance trust-preferred securities. Embedded Value (Closed Block) Securitizations: An insurer can close a block of policies to new business and receive immediate cash from investors in exchange for some RUDOORIWKHIXWXUHHDUQLQJVRQWKDWEORFNRIEXVLQHVV7KHSOHGJHGDVVHWVUHPDLQZLWKWKH insurer and are potentially available in the event of an insolvency. Securitization of Structured Settlements: A structured settlement is an annuity used for settling personal injury, product liability, medical malpractice and wrongful death cases. 7KHGHIHQGDQWW\SLFDOO\DOLDELOLW\LQVXUHUGLVFKDUJHVLWVREOLJDWLRQE\SXUFKDVLQJDQ DQQXLW\IURPDKLJKO\UDWHGOLIHLQVXUDQFHFRPSDQ\6HFXULWL]DWLRQRIDQQXLW\FDVKÀRZV LVDFKLHYHGWKURXJKWKHXVHRIDEDQNUXSWF\UHPRWH6397KHLVVXHURIWKHVHFXULWLHV WKH639UDLVHVIXQGVIURPLQYHVWRUVWKDWDUHXVHGWRSXUFKDVHDQQXLW\FDVKÀRZVIURP WKHDQQXLWDQWV7KHFDVKÀRZVUHFHLYHGE\WKHLVVXHUDUHXVHGSULPDULO\WRVHUYLFHWKH principal and interest payments due the investors. Mortality Catastrophe Bonds: Investors in these bonds lose money only if a level of 91.8 96.3 108.9 100.7 101.4 103.9 88.6 92.2 109.7 101.9 97.1 101.5 90.0 97.9 114.0 104.6 102.1 110.3 0 20 40 60 80 100 120 European Big FourUS & BermudaLloyd's Ratio Loss RatioExpense RatioCombined Ratio Source: AM Best data and research Global Reinsurance – Combined RatioSPOTLIGHT www.ambest.com49www.ambest.com49 GHDWKVOLQNHGWRDFDWDVWURSKLFHYHQWH[FHHGVDFHUWDLQWKUHVKROG7KHHYHQW¶VWULJJHULV H[WUHPHIRUH[DPSOHDSDQGHPLF7KHVHDUHDGHULYDWLYHRIQDWXUDOFDWERQGV Life Settlement Securitizations: A life settlement contract is a way for a policyholder to liquidate a life insurance policy. A portfolio of these contracts may be securitized to provide a source of capital. However, certain variables, such as regulatory issues and the uncertainties associated with predicting life expectancies, can create obstacles that may slow their path to the marketplace. Securitization of Reinsurance Recoverables: Insurance and reinsurance companies KDYHEHHQ¿QGLQJDOWHUQDWLYHZD\VWRUHGXFHWKHLUH[SRVXUHWRXQFROOHFWLEOHUHFRYHUDEOHV and reduce the concentration risk associated with ceded exposures. One approach is the securitization of reinsurance recoverables, which involves a structured debt instrument that transfers risk associated with the risk of uncollectible reinsurance to the capital PDUNHWV7KLVULVNWUDQVIHUPD\DOVREHDFFRPSOLVKHGWKURXJKWKHXVHRIFROODWHUDOL]HG debt obligation technology. Winds of Change: Derechos, Snowstorms and Other Catastrophes Are Becoming a Growing Problem for Insurers 'HHSIUHH]HVLQ7H[DVDQGGHUHFKRV in the Midwest have gotten insurers talking about and moving toward better modeling, risk selection and pricing. Hours after a derecho touched down LQ,RZDLQ$XJXVW)LUVW0D[¿HOG Mutual President Randy Druvenga was in a whirlwind of his own. From his R൶FHLQ'HQYHU,RZDDERXWPLOHV from Cedar Rapids—where the derecho did considerable damage, Druvenga began contacting reinsurers and agency IRUFHDQGDVVHPEOHGVWD൵DGMXVWHUVDQG contractors on the ground. He and his team were prioritizing claims, utilizing estimating software and satellite images WRDVVHVVSURSHUW\GDPDJHVDQG¿QGLQJ temporary homes for displaced members and livestock. )LUVW0D[¿HOGRQO\ZULWHVLQWKHVWDWH VRPDQ\FOLHQWVZHUHD൵HFWHGZLWKRQH member’s house a total loss after a two- VWRU\EDUQIURPDFURVVWKHURDGEOHZR൵ its foundation and into their home. Cell towers were knocked down by powerful ZLQGVDQG³&29,'KDQJLQJRYHU RXUKHDGV´DGGHG'UXYHQJDPDGHLW GL൶FXOWWRUHDFKVRPHSROLF\KROGHUV and get into homes where others were quarantining. In February 2021, as a historic deep freeze pummeled the southern U.S., Arrowhead Insurance Risk Managers Executive Vice President and Chief 8QGHUZULWLQJ2൶FHU1LHOV6HHEHFNZDV RQWKHSKRQHZLWKD7H[DVFXVWRPHU ZKRZDVVWDQGLQJLQKLVGHJUHH NLWFKHQ³,WROGKLPWRKDQJXSSPOTLIGHT 50 WKHSKRQHDQGWXUQR൵KLVSLSHVEHIRUH they froze. He didn’t know to do that or to winterize his home because storms like these are rare events in that part of WKHVWDWH´ While derechos, or straight-line thunderstorm wind events, are fairly common in the Midwest, last year’s KRXUHYHQWZDVDQDQRPDO\LQWKDW it spread across thousands of square miles in multiple states, pounded highly- populated Iowa cities including Des Moines and Cedar Rapids and damaged millions of acres of crops in the nation’s Corn Belt, leaving insurers with roughly $7.5 billion of unexpected losses, according to Aon. 7KHZLQWHUZHDWKHURXWEUHDNGLVUXSWHG businesses and supply chains and OHIWPDQ\KRPHRZQHUVLQ7H[DVZLWK burst water pipes, damaged roofs and widespread power outages sparked by DFULSSOHGHOHFWULFJULG7KHH[WUHPH weather, which hit the Lone Star State particularly hard, unveiled infrastructure LQH൶FLHQFLHVLQDUHDVQRWRIWHQKLW by severe winter storms, prompting insurers such as the Alpharetta, Georgia-based Arrowhead to scramble to help unprepared insureds. 7KHVHGHDGO\HYHQWVDUHH[DPSOHVRID growing type of catastrophe, one that Karen Clark & Co. co-founder and CEO .DUHQ&ODUNFDOOV³QRQWDLOODUJHORVV´ RU³QRWLQWKHWDLORIWKHGLVWULEXWLRQ´ Unlike a rare event—think, a one-in- 100-year hurricane that could cause losses exceeding $100 billion—large- loss, non-tail events occur more frequently and sometimes in areas not typically associated with those perils. While non-tail calamities don’t cause single-event losses large enough to make it into the tail of the loss distribution, &ODUNVDLG³FROOHFWLYHO\RQDQDQQXDO aggregated basis, insurers now are paying out about twice as much for those events than the long-run expected DQQXDODYHUDJHIRUKXUULFDQHV´ Last year’s derecho is the single costliest thunderstorm cluster event on record, according to Aon’s Weather, Climate & Catastrophe Insight 2020 Annual Report. Druvenga, who also sits on the board of Grinnell Mutual in Iowa, noted WKHVWRUPZDV¿YHWLPHVODUJHUWKDQDQ\ other single event in Grinnell’s history. ,QGXVWU\UHSRUWVVD\WKH¿QDQFLDOWROO exceeded that of nine of last year’s record 10 U.S. landfalling hurricanes DQGWURSLFDOVWRUPV7KH¿UVWTXDUWHU is typically a more benign period for VLJQL¿FDQWFDWORVVHVDFFRUGLQJWRD %HVW¶V&RPPHQWDU\³3RWHQWLDO5HFRUG &DWDVWURSKH/RVVHVIRU7H[DV,QVXUHUV 'XHWR:LQWHU6WRUP8UL´%XWVRPH industry experts are now seeing a shift Karen ClarkSPOTLIGHT www.ambest.com51 and expect costly non-tail catastrophes throughout the year to become the norm. Modeling Changing Risks 'UXYHQJDVDLGWKHGHUHFKR³OLWHUDOO\ blew some of the models right out of the water due to its severity, enormity DQGXQLTXHQHVV´,RZD6WDWH8QLYHUVLW\ meteorology professor Bill Gallus said in an interview with a Des Moines 79VWDWLRQWKDWPRVWPRGHOVIDLOHGWR provide forecasters with a hint as to the impending line of intense storms. However, just weeks before this year’s ZLQWHUVWRUPLQ7H[DVVWUXFN.DUHQ &ODUN &RUHOHDVHGWKH¿UVWYHUVLRQRI its winter storm model, which estimated the likelihood of an impending $20 billion winter storm loss event—more than six times the yearly average for that peril, Clark said. She added that this year’s storm is characteristic of a non- WDLOODUJHORVVFDWDVWURSKHWKDW³ZDVLQ RXUPRGHOEHIRUHWKHHYHQWRFFXUUHG´ ³)URPZKDWRXUPRGHOVVKRZWKDWW\SH of arctic air outbreak winter storm is QRZOLNHO\DRQHLQORVVHYHQW´&ODUN VDLG³7KHPDLQWKLQJIRULQVXUHUVLVWKDW they don’t want any surprises or to be looking in the rearview mirror and have WRPDNHPRGHODGMXVWPHQWVDIWHUDORVV´ 5LVNOHYHOVDUHFKDQJLQJ³DQGZKDW was once a one-in-100-year event might now be considered a one-in-75-year or DRQHLQ\HDUHYHQWWRGD\´QRWHG Steve Bowen, a meteorologist and head of catastrophe insight at Aon. More LQVXUHUVDUHQRZEHLQJIRUFHG³WRWKLQN outside the box about events that may not previously have been on the radar or those we assumed would never be SODXVLEOHLQRXUOLIHWLPH´KHDGGHG Insurers are trying to get a better handle RQWKRVHH[SRVXUHVDQG³VHHNLQJPRUH usable, modelable risk data to help us do WKDW´6HHEHFNVDLG³+DYLQJH[WUHPHO\ robust information will help determine our position and allow us to analyze it WRPDNHRXUSRUWIROLRVDFFXUDWH7RGD\ that’s probably one of the most critical things the industry is focused on, and it’s something we take great pride in our DELOLW\WRGR´ Druvenga said Grinnell Mutual plans to recalculate prediction models for catastrophic weather, while First 0D[¿HOG0XWXDOZLOOKLUHDGGLWLRQDOVWD൵ to handle the rise of non-tail catastrophes. ³,IZH¶UHJRLQJWRSXWLQVXUDQFHSROLFLHV in place, we need to be able to service them at the time of loss. Our industry will continue to plan for future events. ,W¶VWKHULJKWWKLQJWRGR7KHZRUVWWKLQJ we can all do is sit back and hope that another event like last year’s derecho GRHVQ¶WKDSSHQDJDLQ´KHVDLG &ODUNVDLGKHU¿UPDFFRXQWVIRUFOLPDWH change and evolving exposures such as non-tail, large-loss perils in its models, ³DQGGRHVQ¶WUHO\RQKLVWRULFDOGDWDWRGR WKDW´6RPHLQGXVWU\H[SHUWVVD\QRWDOO catastrophe models have kept pace with WKHFKDQJLQJODQGVFDSH7KH\DUHQRZ calling for updates to those models. Clark expects the rising threat of costly non-tail calamities to force insurers to reevaluate how they price and manage the risk. —Lori ChordasSPOTLIGHT 52 Laboratory of the Minds Lloyd’s roots date to 1688, when ship merchants met in Edward Lloyd’s /RQGRQFR൵HHVKRSWRVKDUHDEHYHUDJH and the risk of doing business. 7KHPDUNHWHYROYHGRYHUWKHQH[W three centuries, birthing the term ³XQGHUZULWHUV´²DVULVNEHDUHUVVLJQHG a slip of paper under the description of risk to indicate how much coverage they ZHUHZLOOLQJWRR൵HU Fast forward to today, when tech companies are working with Lloyd’s Lab—an insurtech accelerator—to facilitate partnerships between cutting- edge technology and the traditional world of insurance. 7KHSURJUDPEULQJVWRJHWKHURU so hand-picked tech companies to collaborate with Lloyd’s, where they are partnered with volunteer mentors. 7KH/OR\G¶V/DEWDSVYROXQWHHU insurance experts from Lloyd’s V\QGLFDWHVWRR൵HULQVLJKWVKHOSXQORFN data and make introductions, and help the insurtechs tailor their solutions so they are in line with the Lloyd’s market’s objectives and values. Lloyd’s has been hosting two cohorts a year, and at the end of November wrapped up Cohort 5, which matched LQVXUWHFKVZLWKPHQWRUV7KLV cohort included companies based in the U.K., U.S., Ireland, Germany and South Africa. With both sides signing nondisclosure statements, Lloyd’s syndicates can provide data points for the tech FRPSDQLHVWRXVH7KH\DOVRKHOS educate the startups on the ins and outs of the insurance business, and share what kind of products they’d like to VHHGHYHORSHG7KHLQVXUWHFKVJLYHWKH LQVXUHUVDGL൵HUHQWSHUVSHFWLYHDQGD new way of thinking about managing risks and using data. Competition to enter the program is ¿HUFH Ed Gaze, senior manager, Lloyd’s Lab, said Lloyd’s scouts for insurtechs around the world and encourages them to apply IRUWKHSURJUDP7\SLFDOO\WR hopefuls apply. ³,W¶VUHDOO\WRXJKWRSLFNWKHWHDPV´ Gaze said. A core group from Lloyd’s whittles the SDFNWRWRWKHQKRVWVDZRUNVKRS with 15 or 20 insurance market representatives who vote, reducing Ed GazeSPOTLIGHT www.ambest.com53 WKHSRROWR7KDWJURXSLVLQYLWHG WR³SLWFKGD\´ZKHUHWKH\JLYHD¿YH minute presentation on what they do, WKHQ¿HOGTXHVWLRQVIRUDQRWKHU¿YH minutes. An audience from the insurance market then votes. Winners are invited to the 10-week program. Once in the lab—and XQOLNHWKH³*UHDW%ULWLVK%DNH2൵´79 show—no one is booted from the group. At the end, participants present their ZRUNGXULQJ³'HPR'D\´DFKDQFHWR VKRZR൵ZKDWZDVDFFRPSOLVKHGGXULQJ the program. Normally, the Lloyd’s Lab takes place in Lloyd’s Lime Street building in London, but the last cohort was fully YLUWXDOGXHWRWKH&29,'SDQGHPLF DQGTXDUDQWLQH*D]HVDLG³,¶PKRSLQJ sometime [in 2021] we’ll be able to JHWEDFNWRVRPHIDFHWRIDFH´*D]H VDLG³:H¶YHUHDOO\PLVVHGEXLOGLQJWKH HFRV\VWHPWKDWZHKDGLQ´ Working remotely via video chat has been successful, he said, and several of the tech companies were focused on COVID-related solutions. Divided by a Common Language Insurtechs and insurers can face challenges communicating, even if everyone is speaking English. ³6RPHWLPHVLW¶VMXVWGL൵HUHQWODQJXDJH DQGGL൵HUHQWFXOWXUH´VDLG3DXO 3UHQGHUJDVWFKLHIH[HFXWLYHR൶FHURI Blink, a parametric technology company and Lloyd’s Lab participant. Insurtechs often have insurance questions that can be quickly answered E\WKHULJKWSHRSOH*D]HVDLG³7KH\ come to insurers to both sell themselves but also to get some information back DQGKHOSLPSURYHWKHLUSURGXFWV´KH said. 7KHSURJUDP³UHDOO\RSHQHGXSWKLV conversation and closed the gap between LQVXUWHFKDQGWUDGLWLRQDOFDUULHUV´VDLG Cathine Lam, another participant and also the lead data scientist/actuary for Metabiota, an insurtech that tracks epidemics and their economic impact. ³,WEULQJVSHRSOHWRJHWKHU²FDUULHUVZKR are seeing new, innovative solutions, and also insurtechs with the right subject matter experts in this think tank—to JHQHUDWHXQFRQYHQWLRQDOVROXWLRQV´/DP VDLG³%HIRUH/OR\G¶V/DEZHKDGORWV of ideas, but it’s talking with the carriers that’s really helped us home in and focus RQZKDWPDWWHUV´ —Meg GreenCHAPTER 6: FISCAL FITNESS & AM BEST 54 Insurance Stands the Traditional Business Cycle on Its Head Most industries work as follows: s�� Build product. s�� Incur costs. s�� Price product. s�� Sell product. s�� Generate revenue. But insurance works largely in reverse: s�� Build product. s�� Price product. s�� Sell product. s�� Generate revenue. s�� Incur costs. 7KHVLJQL¿FDQFHRIWKLVUHYHUVHGUHYHQXHFRVWF\FOHLVWKDWWKHSURGXFWLVSULFHG DQGVROGEDVHGRQDQHVWLPDWHRIIXWXUHFRVWVWREHLQFXUUHG7KHVHHVWLPDWHVFDQ EHZURQJIRUDQ\QXPEHURIUHDVRQVLQFOXGLQJFDWDVWURSKHVFODLPFRVWLQÀDWLRQ FKDQJHVLQOHJDOFOLPDWHQHZO\LGHQWL¿HGH[SRVXUHVQRWNQRZQDWWKHWLPHWKH LQVXUDQFHSROLF\ZDVVROGVRFLDOFKDQJHVLQYHVWPHQWPDUNHWÀXFWXDWLRQVDQGRWKHU factors. 7KLVPHDQVWKDWLQVXUHUVPXVWEHYHU\JRRGDWSUHGLFWLQJWKHIXWXUHDQGYHU\SUXGHQW in administering their business over the long term. It directly results in what are known as underwriting cycles. It’s also an important reason why the number of insurance insolvencies sometimes spikes in periods following catastrophes or market disruptions. 7KHLQVXUDQFHLQGXVWU\LVOHVVWDQJLEOHLQWKDWWKHDFWXDOFRVWRILWVSURGXFWLVQ¶W SUHFLVHO\NQRZQDWWKHWLPHRIVDOH7KHWUXHFRVWLVGHWHUPLQHGDWDODWHUSRLQWRIWHQ PXFKODWHU<HWULVNLVWDNHQRQDORQJZLWKXQSUHGLFWDEOHH[RJHQRXVIDFWRUVWKDW XOWLPDWHO\GHWHUPLQHSUR¿WRUORVV:KLOHLQVXUHUVJDXJHWKHSUREDELOLW\RIDODUJH catastrophic event or some latent liability, these scenarios still cause a supply shock. A VLPSOL¿HGH[SODQDWLRQLVWKDWWKHLQVXUDQFHF\FOHLVGULYHQE\VXSSO\DQGGHPDQG,I capacity is lacking, the price of risk transfer goes up. CHAPTER 6: FISCAL FITNESS & AM BEST www.ambest.com55 The Risk of Financial Impairment 7KHEXVLQHVVRILQVXUDQFHEHFDXVHRIWKHLQYHUWHGF\FOHLQZKLFKUHYHQXHVDUH received well before claims are incurred and must be paid (or even known), presents VSHFLDOFRQFHUQV7KHUHDUHDP\ULDGRILVVXHVEXWWKHEDVLFFRQFHUQLVDVVXULQJWRWKH extent reasonably possible, that insurance policy premiums and deposits received by an insurer today will be properly managed and available for payment of claims and RWKHUSROLF\EHQH¿WVSHUKDSVPDQ\\HDUVLQWKHIXWXUH As a result, the insurance industry is subject to extensive regulation in the United States and in most other countries. In general, regulatory oversight focuses on three primary elements: market soundness, including rate regulation and promoting adequate insurance availability and healthy levels of competition; market conduct, including review of market participant practices to assure proper conduct and fairness LQGHDOLQJVZLWKFXVWRPHUVDQG¿QDQFLDOVRXQGQHVVLQFOXGLQJRQJRLQJVXUYHLOODQFH RILQVXUDQFHHQWLWLHV¶¿QDQFLDOFRQGLWLRQDQGDYDULHW\RISRVVLEOHUHJXODWRU\DFWLRQV WKDWPD\EHWDNHQLIWKHUHDUHLQGLFDWLRQVRI¿QDQFLDOGLVWUHVV ,QWKH8QLWHG6WDWHVWKHVH¿QDQFLDOVRXQGQHVVUHJXODWRU\DFWLRQVPD\FRQVLVWRI required company action plans, various forms and levels of regulatory supervision DQGOLFHQVXUHDFWLRQV,QFHUWDLQLQVWDQFHVWKHVHDFWLRQVDUHLQVX൶FLHQWDQGWKHQH[W level of action involves conservation, rehabilitation and/or insolvent liquidation. Conservation is undertaken in certain cases for the purpose of obtaining control of the entity and conserving assets while a review of the situation is conducted. Rehabilitation is undertaken when it appears that special actions are required to maintain the entity’s solvency, but with these actions, solvency appears possible. Insolvent liquidation is judged necessary when it is clear that the entity’s assets will QRWEHVX൶FLHQWWRGLVFKDUJHDOORIWKHHQWLW\¶VREOLJDWLRQV According to earlier studies of impairments by AM Best, impairments varied by line RIEXVLQHVVZLWKZRUNHUV¶FRPSHQVDWLRQLQVXUHUVVX൵HULQJWKHPRVWLPSDLUPHQWV )UDXGKDVEHHQDIUHTXHQWO\LGHQWL¿HGFDXVHEXWPRVWIDLOXUHVFDQEHXQGHUVWRRGDV general business failures associated with poor business strategy/execution and weak management. State guaranty funds exist to cover unpaid claims of insolvent insurers, but these guaranty funds are generally limited in the coverage they provide to certain types RILQVXUDQFHDQGZLWKWKUHVKROGVRIWKHDPRXQWVWKH\FDQSD\7KHUHPD\DOVREH considerable delays associated with payments by guaranty funds. It therefore continues to be in the strong interest of policyholders to choose their LQVXUDQFHSURYLGHUFDUHIXOO\DQGWRPRQLWRUWKHSURYLGHU¶V¿QDQFLDOKHDOWKWKURXJKRXW WKHSROLF\SHULRG$0%HVWKDVDVWURQJUROHLQWKLVH൵RUWE\SURYLGLQJLQWHUDFWLYH ratings evaluations on an ongoing basis. CHAPTER 6: FISCAL FITNESS & AM BEST 56 7KH$0%HVWLQWHUDFWLYHUDWLQJSURFHVVLVYROXQWDU\DQGVXEMHFWVFRPSDQLHVWR independent, objective evaluations of balance sheet strength, operating performance and other critical factors. Not surprisingly, impairments have occurred much more frequently with companies choosing not to subject themselves to this rigorous process. Overview: Best’s Credit Rating Evaluation 7KHIRXQGDWLRQRI$0%HVW¶VFUHGLWUDWLQJSURFHVVLVDQRQJRLQJGLDORJXHZLWK the rated company’s management, which is facilitated by a rating analyst. Each LQWHUDFWLYHO\UDWHGHQWLW\LVDVVLJQHGWRDUDWLQJDQDO\VW7KHUDWLQJDQDO\VWPDQDJHV the ongoing interaction with company management and conducts the fundamental FUHGLWDQDO\VLVGHVFULEHGLQ$0%HVW¶VUDWLQJFULWHULD7KHUDWLQJDQDO\VWPRQLWRUVWKH ¿QDQFLDODQGQRQ¿QDQFLDOUHVXOWVDQGVLJQL¿FDQWGHYHORSPHQWVIRUHDFKUDWHGHQWLW\ or issue in his/her portfolio. While ratings are generally updated on an annual basis, DUDWLQJUHYLHZFDQWDNHSODFHDQ\WLPH$0%HVWEHFRPHVDZDUHRIDVLJQL¿FDQW development that may have an impact on the rating. 7KHRQJRLQJPRQLWRULQJDQGGLDORJXHZLWKPDQDJHPHQWRFFXUVWKURXJKVFKHGXOHG rating meetings, as well as interim discussions on key trends and emerging issues as QHHGHG7KHVHPHHWLQJVD൵RUGWKHUDWLQJDQDO\VWWKHRSSRUWXQLW\WRUHYLHZIDFWRUVWKDW PD\D൵HFWWKHFRPSDQ\¶VUDWLQJVLQFOXGLQJLWVVWUDWHJLFJRDOV¿QDQFLDOREMHFWLYHV and management practices. Best’s Credit Ratings are initially determined and periodically updated through a GH¿QHGUDWLQJFRPPLWWHHSURFHVV7KHUDWLQJFRPPLWWHHLWVHOIFRQVLVWVRIDQDO\WLFDO VWD൵DQGLVFKDLUHGE\VHQLRUUDWLQJR൶FHUV7KHFRPPLWWHHDSSURDFKHQVXUHVUDWLQJ FRQVLVWHQF\DFURVVGL൵HUHQWEXVLQHVVVHJPHQWVDQGPDLQWDLQVWKHLQWHJULW\RIWKH UDWLQJSURFHVV7KHUDWLQJSURFHVVFRQVLVWV of the following broad components pictured below: Compile Information 7RGHYHORSDQLQLWLDO%&5RUWRXSGDWHDQ existing BCR, the rating analyst may gather GHWDLOHGSXEOLFDQGSURSULHWDU\¿QDQFLDO information and use this information to develop a tailored meeting agenda for a rating meeting. A scheduled rating meeting with the company is a key source of additional quantitative and qualitative information, LQFOXGLQJWKHFODUL¿FDWLRQRILQIRUPDWLRQ previously received or obtained. Key executives are present to discuss their areas of responsibility, including strategy, distribution, "ROAD�#OMPONENTS�� OF�THE�2ATING�0ROCESSCHAPTER 6: FISCAL FITNESS & AM BEST www.ambest.com57 underwriting, reserving, investments, claims, HQWHUSULVHULVNPDQDJHPHQWDQGRYHUDOO¿QDQFLDO results and projections. Material Sources of Information In arriving at a rating decision, AM Best relies primarily on information provided by the rated entity, although other sources of information PD\EHXVHGLQWKHDQDO\VLV7\SLFDOLQIRUPDWLRQ provided includes a company’s annual and TXDUWHUO\LIDYDLODEOH¿QDQFLDOVWDWHPHQWV presented in accordance with the customs or regulatory requirements of the country of domicile. Other information and documents that may be reviewed include, but are not limited to: interim management reports on emerging LVVXHVUHJXODWRU\¿OLQJVFHUWL¿HGDFWXDULDO and loss reserve reports, investment guidelines, internal capital models, Own Risk and Solvency Assessment reports, annual business plans, Best’s Supplemental Rating Questionnaire or other supplemental information requested by AM Best, information provided through scheduled rating meetings and other discussions with management, and information available in the public domain. Ultimately, if AM Best is unable to obtain the information deemed necessary to appropriately review and analyze the rated entity (before or after the initial rating release or subsequent rating update) or if the quality of the information is deemed unsatisfactory, AM Best reserves the right to take a rating action based on reasonable assumptions, withdraw any existing interactive rating, or cease the initiation of any new BCR. Perform Analysis 7KHDQDO\WLFDOSURFHVVLQFRUSRUDWHVDKRVWRITXDQWLWDWLYHDQGTXDOLWDWLYHPHDVXUHV WKDWHYDOXDWHSRWHQWLDOULVNVWRDQRUJDQL]DWLRQ¶V¿QDQFLDOKHDOWKZKLFKFDQLQFOXGH underwriting, credit, interest rate, country, and market risks, as well as economic and UHJXODWRU\IDFWRUV7KHDQDO\VLVPD\LQFOXGHFRPSDULVRQVWRSHHUVLQGXVWU\VWDQGDUGV and proprietary benchmarks, as well as the assessment of operating plans, philosophy, PDQDJHPHQWULVNDSSHWLWHDQGWKHLPSOLFLWRUH[SOLFLWVXSSRUWRIDSDUHQWRUD൶OLDWHV Determine the Rating All BCRs are initially determined and subsequently updated by a rating committee. 7KHUDWLQJDQDO\VWSUHSDUHVDUDWLQJUHFRPPHQGDWLRQIRUUDWLQJFRPPLWWHHUHYLHZDQG deliberation based on an analytical process. Each rating recommendation is reviewed DQGPRGL¿HGDVDSSURSULDWHWKURXJKDULJRURXVFRPPLWWHHSURFHVVWKDWLQYROYHVD UDWLQJDQDO\VWSUHVHQWLQJLQIRUPDWLRQDQG¿QGLQJVWRFRPPLWWHHPHPEHUV$OOUDWLQJ ICR = Issuer Credit Rating FSR = Financial Strength Rating Note: D is used for non-insurers and securities. The rating symbols A++, A+, A, A-, B++, B+ are registered certiﬁcation marks of AM Best Rating Services, Inc. Long-Term ICRFSR aaa, aa+A++ aa, aa-A+ a+, aA a-A- bbb+, bbbB++ bbb-B+ bb+, bbB bb-B- b+, bC++ b-C+ ccc+, cccC ccc-, ccC- cDNext >