Transcript CAS Annual Meeting Rating Agencies Matthew C. Mosher, FCAS, MAAA Group Vice President Property/Casualty Ratings November 15, 2005

CAS Annual Meeting
Rating Agencies
Matthew C. Mosher, FCAS, MAAA
Group Vice President
Property/Casualty Ratings
November 15, 2005
Discussion Topics
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Capitalization’s Role in Rating Analysis
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Risk Management’s Role in Rating Analysis
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Role of Other Models in the Rating Process
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Challenges

Overview of Current Model (BCAR)
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Summary
Capitalization’s Role in Rating
Analysis
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Rating Analysis is Far More than Just Running Models
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Very Important, but Importance Varies Depending On:
 Stability of Operating Performance
 Level of Operating Performance
 Shock Loss Exposure
 Market Conditions
 Business Profile

General Risk Management Practices
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Focus is on the Correct Level of Capital to Appropriately Minimize Risk
for a Rating Level
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No Penalty for Holding Additional Capital
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Capitalization Alone is Not Enough to Achieve Highest Rating Levels
Risk Management’s Role in Rating
Analysis
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In Aggregate, the Most Important Issue

Ability to Monitor Risk Aggregation
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Use of Information in Company Strategy
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Emphasis on Risk Management
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Consideration for Correlation of Risks
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Risk-Adjusted Capitalization
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Risk Management is Necessary to Achieve Highest
Rating Levels
Role of Other Models in the
Rating Process
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Always Willing to Consider External Models
Quality of the Model and Assumptions
Determine the Impact on the Rating
Key Issues to Review:
 Level of Security Targeted
 Time Frame of Security
 Assumptions with in the Model

Correlation
 Independence – Expected LR or Indicated LR
 Calibration of Reserve Variability and Pricing Variability
 Underwriting Cycle
 Economic Model
Modeling Challenges
Consistency of the Evaluation
 Source/Amount of the Data
 Complexity vs.
Simplicity/Understanding
 Integration of Businesses
 Importance of Assumptions

BCAR Considerations: Assets
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Credit Quality Assets
Market Risk
Diversity of Assets
Dependence on Reinsurance
Liquidity
Capital Structure
BCAR Considerations: Underwriting
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Amount and Type of Business Written
Profitability of Business
Market Conditions by Line
Growth Rate, Depending on Market
Adequacy of Loss Reserves
Payout Pattern of Losses
Stability of Loss Development Pattern
Gross and Net Catastrophe Exposure
Size of the Company and Resources Available
Impact of Reinsurance and Level of Risk Transfer
Frequently Made Adjustments
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Reserve Adequacy (Core & A&E)
Reinsurance Charges
Catastrophe Exposure
Affiliated Charges
Stop Loss Reinsurance
Reinsurance Terms
Loss Sensitive Business
Source of Business Growth
Projected Capitalization
Summary
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Models are only Tools
Use of Models and Overall Risk Management
is Key
Comfortable but Not Satisfied with Current
Model
Evolving Issues and Tools Require
Improvement
Key Focus Areas:
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Investments
Correlation
Integration of Business Segments
Calibration