CEO SuRVEy: THE RATING AGENCIES
We asked these questions:
• Are rating agencies the new regulators?
• How useful is their process to the companies they review,
A handful of CEOs answer
investors and the general markets?
some pointed questions on
• Do the agencies have too much power? and
• Will they benefit from the new proposed regulation in the US?
the rating agencies.
The last item is covered elsewhere in these pages. Few chief
executive officers knew of the pending legislation to change
the way in which the rating agencies are regulated, which sug-
gests that it cannot be that important.
Chris O’Kane—Chief executiv e officer The industry went through something of a traumatic experience last year,
Aspen Group and I think the rating agencies did as well. The property and casualty
underwriting business, the catastrophe modelling business and the rating
The phrase “the new regulators” may sound like a good line, but it
agencies learned a lot about extreme events.
is a mistaken view of what’s going on. Rating agencies and regulators
are two different things. When you think of insurance regulation in Whatever we believed two years ago about catastrophe risk was dif-
the US, you think of consumer protection and fair rates, but the rating ferent from what we thought last year, and last year differed from this
agency agenda is different. It is to offer a view of companies’ financial year. It’s important to learn. If the agencies remained stagnant and did not
strength. I would describe the rating agencies as relatively agnostic about change their rating methodologies, then they would not be doing their job
the “fairness” of pricing. correctly. Based on what our industry has learned from the past couple of
years, learning organisations have each implemented significant improve-
So it’s a little bit misleading to call them the new regulators. Maybe
ments in their processes. Rating agencies are looking at these and judging
it’s a way of saying they are more influential than they used to be. Rat-
accordingly, which is entirely rational.
ings are now a vital requirement in doing business if you want to write
reinsurance around the world, but this is not something that the rating
agencies have brought about—it is a response to a need felt by the buyers
Kenneth J. LeStrange—Chairman, president and chief executive officer
of reinsurance.
Endurance Specialty Holdings Ltd.
How useful are the agencies? There is a fair amount of value that rated
I do not believe that the rating agencies have become the new regula-
companies can take out of the ratings process (remembering that differ-
tors, but their influence on the industry has grown significantly in the last
ent agencies do different things). They don’t offer advice, but as you go
10 years. Rating agency standards for capital adequacy are the most signifi-
through the process of what it is they see as hallmarks of strengths and
cant influence on the capital structure of property/casualty insurance and
weaknesses, you can discern their views. In going through the ratings pro-
reinsurance companies.
cess, you can learn from them, have healthy debates and use their views
to help inform decisions, if you wish to.
Rating agency review processes have become more robust and granular
over time, and therefore provide a valuable perspective to their constituen-
In terms of whether the agencies offer value to policyholders, they
cies. There is no doubt that rating agencies have the ability to wield a great
provide an indication, not a guarantee of financial strength. If you look at
deal of power over the insurance industry. In my mind, this power brings
failure rates, sometimes they are surprising, so it’s simply a guide to claims
with it certain obligations and responsibilities. The rating agencies need
paying that you’re buying when you look at agency reports.
to be transparent and consistent, and to continue to invest in the expertise
I hear it said sometimes that the agencies have too much power. needed to fulfill their role.
BermudaReinsurance . November 2006 19
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