9 September 2013 Insurance

11 top tips for managing your rating agencies

Litmus Analysis, the consultancy that specialises in helping companies better understand their financial strength and ratings, gives 11 top tips on how reinsurers can better manage their relationships with rating agencies.

1. Make sure the agency capital model is completed properly This seems obvious, but we’ve seen a number of examples where there were errors that weak- ened the result and/or key strengths that could have been highlighted but were missed.

2. Prospective earnings are crucial, but you have to make a compelling case for them Both AM Best and S&P have always seen prospective earnings as fundamental to the rating and S&P’s recent criteria change makes this even more explicit. It’s partly about your track-record but also the ‘why’ of how your market position, competitive advantages and underwriting controls will deliver the results you are forecasting.

3. They are NOT asking you to diversify! It might seem this way and they might even appear to suggest it (although they shouldn’t as that would constitute ‘advice’) but this is just a confusion of the analytical point. Namely, concentration risk is a fact of life for specialists and you get penalised for it if that is your profile. That is not ‘solved’ by ‘diversification for diver- sification’s sake’, unless it’s into areas you can demonstrate you really understand well and that you will not be ‘buying business’ (both of which they will be concerned about).

4. Reserve adequacy is always a concern It’s the hardest thing for a third-party analyst to be confident about. If you think you over-reserve, provide as much supporting evidence (succinctly!) that you can. If you have under-reserved in the past they are bound to be worried, so address it.

5. Remember, ratings are decided by committees (not individuals or computers) The analysts you meet are your communication channel to the members of the committee. Not only do you need them to believe in the strength of your profile they need to be able to effectively explain this to a committee whose job is – in part – to be sceptical.

6. Why don’t they believe us? Claiming future success (even given a strong track-record) is not enough. It might seem galling that they won’t just accept what you say at face value but that’s their job. Give analytical reasons for believing in your strengths (market share, distribution channel strengths, underwriting controls, specialist knowledge, strength of client relations etc.) and data/research that support them.

7. Don’t look to rely on ‘comments’ you make at the management meeting If it’s important, put it in the presentation. Even if they accurately note all your verbal comments and responses to questions, they may not remember the exact rationale. That will not work with the committee.

8. Understand the point of each part of the criteria and address all their questions Each part of the rating criteria has a point to it in terms of deciding the rating. The better everybody involved understands what that is, the more likely you are to successfully explain your strengths in that context and/or address any perceived weaknesses.

9. Make sure the message is clear and memorable If you believe you have a good story to tell on any part of the analysis put the message in the slide heading (don’t leave it as the final bullet at the bottom of the slide!). If something is subjective use memorable anecdotes to illustrate the point.

10. Graphs and diagrams are good but don’t be too clever, or cute, with them Use graphs to clearly show the important trend, fact or process. But don’t make them too complex or the power of the point will get lost. And don’t be ‘cute’ with the years you select or the ‘axis’ of a graph. They will probably spot it (or, worse, they will miss it but somebody at the committee will notice).

11. ERM is a strategic process Make sure you cover your ERM func- tion specifically but also make sure it’s clear how it informs strategy, derives from the board and is embedded across your operations. n Litmus Analysis is staffed by ex-senior rating agency analysts.

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