1. Rating Agency View Of Capital Adequacy: Are They On The Mark? Chet Szczepanski Chief Actuary Pennsylvania Insurance Department

2. Rating Agencies: Cause or Effect?

3. One Regulator’s Perspective I come to praise A.M. Best, not to bury them! Best performs a very valuable service. Best’s Reports is one of the first things I look to when reviewing a company. However …

4. One Regulator’s Perspective Best’s analyses are limited by the quality of the information which they receive. They are subject to the representations of management, actuaries and other financial types.

5. Critical Questions Did rating agency downgrades prompt regulatory action? Were companies in such bad shape to question whether rating agencies missed the mark?

6. Pennsylvania Experience PIC Reliance PHICO Legion

7. Pennsylvania Experience PIC: Medical malpractice writer Discounted reserves Reserve deficiencies Downgraded Doctor’s did not care RBC caught them!

8. Pennsylvania Experience Reliance Multi-line writer Business is rating sensitive Heavily leveraged by reinsurance Heavily leveraged by holding company debt

9. Pennsylvania Experience Reliance (continued) Unicover Reserve deficiencies Downgraded Liquidity, liquidity, liquidity

10. Pennsylvania Experience PHICO Medical malpractice writer Rapid expansion into new markets Reserve deficiencies Downgraded Doctors did not care Liquidity not a problem

11. Pennsylvania Experience Legion Multi-line writer Business is rating sensitive Heavily leveraged by reinsurance Downgraded Reserves? Liquidity, liquidity, liquidity

12. Pennsylvania Experience Common Themes: Reserve deficiencies Ratings downgrades Reinsurance Liquidity

13. Rating Agencies Cause or effect Most definitely both Act too slowly Perhaps Could they have acted more quickly Probably not at this time

14. Rating Agencies Are the basic capital adequacy measures working? Yes, but limited by Quality of information and reliance Static in nature

15. Conclusions We need better and sharper tools Actuarial opinions and reports Reinsurance leverage Dynamic measures Liquidity tests