Firms could explain ratings better
“The effects of ratings on companies are twofold. One is that if they get downgraded below investment grade, that essentially means they have to curtail their business significantly. But the bigger issue is when rating actions hit that are unexpected or not anticipated, and nor are they adequately explained to the market by either the insurer or the rating agency.” - Pat Kenny, president and chief executive of the International Insurance Society (IIS).
IIS chief outlines this year’s talking points
This article appears courtesy of Reactions
Insurance companies and rating agencies could do a better job of explaining downgrades of financial strength ratings, says Pat Kenny, president and chief executive of the International Insurance Society (IIS).
“The effects of ratings on companies are twofold,” Kenny told the iIS Reporter in the run-up to this year’s IIS seminar in Chicago. “One is that if they get downgraded below investment grade, that essentially means they have to curtail their business significantly. But the bigger issue is when rating actions hit that are unexpected or not anticipated, and nor are they adequately explained to the market by either the insurer or the rating agency.” He adds: “Nobody likes surprises.”
Kenny believes insurance companies are the bigger culprits in such situations. “I think rating agencies do a pretty good job of explaining themselves,” he says. “I’m not sure insurance companies always do a good job of understanding and explaining why the rating agency reached the conclusion it did, why the insurance company may either agree or disagree, and what actions it is going to take to change or upgrade whatever opinion the rating agency might have had.”
He adds: “Rating agency actions are the ultimate test of an insurance company’s communication abilities.”
The biggest talking points at this year’s IIS seminar, says Kenny, are likely to be enterprise risk management, natural catastrophes and regulation.
Enterprise risk management is interesting, he says, because, rather than simply being concerned about the risks they underwrite themselves, insurers and reinsurers are becoming more aware of the risks they expose themselves to when they invest in other companies, for example.
Catastrophe risk will be particularly important this year, given the devastating effects of the 2005 hurricane season.
Kenny believes there will be two discussion points about natural catastrophes: the amount of capacity available on the non-life side to cover natural disasters, and the potential risk to the insurance industry’s reputation in the aftermath of these events.
“The insurance industry is in business to pay claims, but sometimes the payment of claims becomes a process more laborious than either the insurer or the insured would want it to be,” says Kenny. “As a result, the industry or a company’s reputation sometimes gets tarnished by what are really pretty straightforward situations.”
As well as discussing catastrophes on the non-life side of the business, companies will also be talking about potentially disastrous losses to the life industry.
“The interesting distinction between life and non-life is that the non-life natural disasters and catastrophes are event driven – tsunamis, hurricanes and so on,” says Kenny. “The life-side disasters are more disease oriented, for example diabetes, obesity, avian flu or Sars [Severe Acute Respiratory Syndrome]. They tend to ramp up slower than a (non-life) event. However, things like diabetes, obesity and so on have a pronounced effect on the life insurance industry, underwriting standards and how you look at a population going forward.”
Regulations are likely to be a big discussion point because of the many efforts to improve and strengthen rules and insurer solvency around the world. Given all of the developments, Kenny believes it is important to try to keep such regulations consistent.
“As you see more multi-national companies doing business across borders, there has to be consistency and harmonization of regulatory approach and standards,” he says.
Reactions is doing a show daily at the IIS event in Chicago.