Insurance CEOs Raise Concerns About Ratings

The increasing influence of rating agencies was a big talking point in the sessions at this year's World Insurance Forum on Bermuda. In their speeches, insurance leaders dealt with a number of rating worries that the industry has had to face recently.

One concern is agencies' increasing capital requirements, which some market observers say could double the amount of capital companies need to hold against U.S. catastrophe business.

Martin Sullivan, chief executive of American International Group, told conference delegates that companies will have to demonstrate to rating agencies that they are allocating capital sensibly. "We have all learnt over the past 12 months that rating agencies do not like surprises. And clearly there were a number of surprises for the rating agencies. It is incumbent on companies to eliminate surprises," he said.

Last year's hurricane season may have caused rating agencies to lose faith in companies' estimates of their exposures.

"If you were at Standard & Poor's or AM Best you'd have to go back to the drawing board and say: 'Do these companies know what they are doing?'" said Neill Currie, chief executive of RenaissanceRe. "The punch line is: sure, things are changing, you just need to enough experience and tools to change with it."

However, some leaders are concerned about rating agencies. Nikolaus von Bomhard, chief executive of Munich Re, said agencies have again changed what they believe is most important when rating a firm. Munich Re had a well-publicised falling out with S&P in 2003 when the rating agency downgraded it because it decided to place more emphasis on companies' profitability.

Von Bomhard is not concerned about the latest changes but points out the difficulty of public companies acting as de facto regulators of the industry. "What rating agencies are coming in and doing is what companies try to do anyway," he said. "The risk is an overreaction. Rating agencies are profit driven and in the public domain. Positive news is taken in slowly by rating agencies whereas negative news is taken in quickly."

Lord Peter Levene, chairman of Lloyd's, agreed with Von Bomhard. He said the role of rating agencies has been blurred. He also questioned whether rating agencies can reasonably apply a uniform model to individual companies.

"Rating agencies have a difficult job," he said. "They are commercial organisations with their own goals. They have a love/hate relationship with the industry. There is a need to sit down and sort out what function they are performing. I have never got clear who they are and what they are there for. The question is whether their models are applicable to looking at an individual company."

Some leaders defended rating agencies. Grahame Chilton, chief executive of reinsurance broker Benfield, said they are essential to reinsurers getting business. He pointed out that ratings help cedants get comfortable with using a particular reinsurer.

"You have to look at it from the customers' view," he said. "Rating agencies give comfort to the customers buying. Rating agencies have a difficult role – they are between the devil and the deep blue sea."

Rating agencies' changes to capital requirements, combined with risk modellers accounting for greater frequency and severity of hurricanes in their models, will have a great effect on companies writing U.S. catastrophe business. In one session, VJ Dowling, managing partner at investment bank Dowling & Partners Securities, predicted companies would need at least 50% more capital for wind business this year.

And Rick Clinton, president of risk modelling firm Eqecat, believes companies may need double the amount they do now. "I would say it would be a 50% to 100% increase in capital requirements. That's a very dangerous situation we are going into," he said.

John Berger, president of Bermudian start-up Harbor Point, said the rating agencies increased capital requirements coupled with the changes to risk models are a double whammy. He believes it will have a big effect on pure catastrophe writers.  But he noted that it could also be dangerous for companies with little experience of casualty business to diversify.

"To be a standalone catastrophe company looks hard to do," he said. "But I've had scary conversations with people where they have said: 'You know, what we need is some of that really stable casualty business.'"