Insurance Ratings: Comparison of Private Agency Ratings for Life/Health
Insurers (Briefing Report, 09/29/94, GAO/GGD-94-204BR).

Private rating agencies can play an important role in providing
consumers with information about insurers' financial health. Concerns
have arisen, however, about the usefulness of these ratings to
consumers. This report (1) compares the rating systems of the five major
raters of life/health insurers--A.M. Best, Duff & Phelps, Moody's,
Standard and Poor's, and Weiss research--over the period August 1989 to
June 1992 and (2) determines which raters were first to report the
vulnerability of financially impaired or insolvent insurers.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-94-204BR
     TITLE:  Insurance Ratings: Comparison of Private Agency Ratings for 
             Life/Health Insurers
      DATE:  09/29/94
   SUBJECT:  Insurance companies
             Financial analysis
             Financial records
             Evaluation methods
             Comparative analysis
             Health insurance
             Life insurance
             Information disclosure
             Systems evaluation
             Insurance regulation

             
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Cover
================================================================ COVER


Briefing Report to the Chairwoman, Subcommittee on Commerce, Consumer
Protection, and Competitiveness Committee on Energy and Commerce
House of Representatives

September 1994

INSURANCE RATINGS - COMPARISON OF
PRIVATE AGENCY RATINGS FOR
LIFE/HEALTH INSURERS

GAO/GGD-94-204BR

Insurance Ratings


Abbreviations
=============================================================== ABBREV

  CPA - Claims-Paying Ability
  NAIC - National Association of Insurance Commissioners
  NOLHGA - National Organization of Life and Health Guaranty
     Associations
  QSR - Qualified Solvency Ratings

Letter
=============================================================== LETTER


B-258206

September 29, 1994

The Honorable Cardiss Collins
Chairwoman, Subcommittee on Commerce,
 Consumer Protection, and Competitiveness
Committee on Energy and Commerce
House of Representatives

Dear Chairwoman Collins: 

Private rating agencies are in a position to play an important role
in providing information to consumers about insurers' financial
health.  However, concerns have arisen about the usefulness of these
ratings to consumers.  In response to your request, this report (1)
compares the rating systems of the five major raters of life/health
insurers--A.  M.  Best (Best), Duff & Phelps (D&P), Moody's, Standard
and Poor's (S&P), and Weiss Research (Weiss) over the period August
31, 1989, to June 30, 1992, and (2) determines which raters were
first to report the vulnerability of financially impaired or
insolvent insurers. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Insurer ratings could not be easily compared across the five rating
agencies because they did not all use the same approach and methods
to rate insurer financial health.  Rating scales and descriptions of
ratings varied by agency and over time.  Weiss placed far less
reliance than the other agencies on analysts' judgment.  Coverage
differed--Weiss was the only agency to rate more than half of all
insurers.  Finally, Weiss and Moody's were less likely than the other
agencies to assign insurers their top ratings.  (See app.  I.)

Best and Weiss provided the most comprehensive coverage of
life/health insurers; between them, they rated the majority of
financially impaired life/health insurers.  Weiss' ratings reflected
financial vulnerability first three times more often than Best in the
cases we compared.  On average, Weiss' ratings reflected financial
vulnerability 8 months earlier than Best.\1 The other agencies--D&P,
Moody's, and S&P--rated, at most, five of the life/health insurers
that became financially impaired during our comparison period.  These
five, among the six largest such insurers, were also rated by Best
and Weiss.  Weiss was the first to assign a vulnerable rating in five
of the six cases; Moody's--which rated only two of the six
insurers--was first in the sixth case.  In no case was Best, S&P, or
D&P first to reflect financial vulnerability for these six insurers. 
In four of these cases, Best did not assign a vulnerable rating until
after the first public regulatory action.  (See app.  II.) Our
results are not projectible and apply only to the time period of less
than 3 years that the data cover. 


--------------------
\1 As further explained in appendix III, we placed a limit on the
number of days we credited by starting the count from the day Weiss
first published life/health insurer ratings. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :2

To obtain information about life/health insurer ratings and related
studies, we reviewed relevant articles, spoke with insurance experts,
and interviewed representatives of the five major rating agencies
publishing life/health insurer ratings --Best, D&P, Moody's, S&P, and
Weiss. 

We used ratings and other information obtained from the rating
agencies and the National Association of Insurance Commissioners
(NAIC) to compare the agencies' rating scales, descriptions, and
methodologies, as well as industry coverage and actual ratings.  We
used data from August 31, 1989, to June 30, 1992.  August 31, 1989,
was the date Weiss first published life/health insurance ratings; a
comparison with the other four agencies would not have been possible
before that date. 

In addition, we compared the raters' timing in reporting financial
vulnerability.  We did this by comparing when the raters assigned
"vulnerable" or "noninvestment grade" ratings to insurers that became
financially impaired or insolvent.  We defined financial impairment
or insolvency in the same manner as state insurance regulators and
NAIC.  We used the date of the first public regulatory action as our
reference point.  Data on state regulatory actions were obtained from
NAIC, various state regulators, the National Association of Life and
Health Guaranty Associations (NOLHGA), Best, S&P, and an insurance
industry expert.  (App.  III has more detailed information about our
objectives, scope, and methodology.)

We did our work between January 1992 and September 1994 in accordance
with generally accepted government auditing standards.  We asked the
rating agencies to review the facts contained in a draft of this
briefing report.  We received responses from Best, Moody's, S&P, and
Weiss, who did not raise factual concerns.  However, Best, Moody's,
and S&P provided other comments critical of the report.  We addressed
these comments in appendix III. 


---------------------------------------------------------- Letter :2.1

As agreed with your office, unless you publicly announce the contents
of this report earlier, we will not distribute it until 7 days after
the date of this letter.  At that time, we will send copies to Best,
D&P, Moody's, S&P, Weiss, and NAIC.  Copies will also be made
available to other interested parties on request. 

Please contact me on (202) 512-8678 if you have any questions
concerning this report.  The major contributors to this report are
listed in appendix IV. 

Sincerely yours,

Helen H.  Hsing
Associate Director, Financial Institutions
 and Markets Issues


COMPARISON OF RATING SYSTEMS
=========================================================== Appendix I

Figure I.1:  Ratings Could Not Be Easily Compared


   RATINGS COULD NOT BE EASILY
   COMPARED
--------------------------------------------------------- Appendix I:1

The five rating agencies that rate life/health insurers--Best, D&P,
Moody's, S&P, and Weiss--did not all use the same approach and
methods to rate insurer financial health during the period of our
analysis. 

The rating agencies used different symbols and numbers of ratings in
their rating scales.  In some cases, the same letter rating was used
by various raters.  However, it did not necessarily occupy the same
relative position in the respective rating scales.  For example, an
"A+" was Weiss' highest rating; Best's second-highest score; and
D&P's and S&P's fifth-highest score. 

The same letter rating also had different descriptions from the
various raters.  The "A+" rating was described as "excellent" by
Weiss, "superior" by Best, and "good" by S&P.\1 Even the same letter
rating within one rater's system may have had a different meaning at
two points in time.  During the time that we did our work, Best
changed its rating system twice, both adding new ratings and changing
the definition of existing ratings.  In 1992, it added three new
ratings, dropping its "A+" rating from first to second place.  And,
in 1994, it adopted the two-category "secure/vulnerable"
classification used by most of the other raters. 

All rating agencies, with the exception of Weiss, said that they
placed a great deal of reliance on analysts' judgment both in
assessing an insurer's management and in adjusting an insurer's
rating at the end of the rating process.  In contrast, while Weiss
used judgment to create and modify the mathematical model that it
used to determine the ratings, Weiss did not use judgment to assess
management or to alter the results produced by the model for an
insurer at the end of the rating process. 

The agencies also differed in the number of life/health insurers they
rated.  Weiss, which does not charge insurers a fee, rated most
insurers.  The other rating agencies, which usually charge fees,
rated fewer insurers.  However, because all agencies generally rated
the largest insurers, they each covered at least 50 percent of the
life/health insurance industry's assets. 

The five raters also varied in their assignment of ratings to
insurers.  We compared the agencies' distribution of ratings both for
(1) insurers rated by each agency individually and (2) insurers rated
in common between agencies, two agencies at a time.  In both of these
comparisons, Weiss and Moody's were less likely than the other raters
to assign insurers their top ratings. 

   Figure I.2:  Rating Scales
   Differed

   (See figure in printed
   edition.)

\a Weiss and Best use additional symbols to designate that they
recognize an insurer's existence but do not provide a rating.  These
symbols are not included in this table. 

\b Best added the A++, B++, and C++ ratings in 1992.  In 1994, Best
classified its ratings into "secure" and "vulnerable" categories,
changed the definition of its "B" and "B-" ratings from "good" to
"adequate", and assigned these ratings to the "vulnerable" category. 
This table contains GAO's assignment of Best's ratings to bands based
on our interpretation of their rating descriptions prior to 1994. 

\c S&P discontinued CCC "+" and "-" signs, CC, C, and D ratings, and
added the R rating in 1992. 

Source:  GAO. 


--------------------
\1 Although D&P's full description for "A+" was similar to that of
S&P, D&P did not use a single word descriptor similar to S&P's
"good."


   RATING SCALES DIFFERED
--------------------------------------------------------- Appendix I:2

The rating agencies used different symbols and different numbers of
ratings in their scales.  The number of ratings used ranged from 15
(Best) to 20 (D&P).  Weiss' top rating was "A+", Best's "A++", S&P's
and D&P's "AAA", and Moody's "Aaa."

Although the same letter ratings were used by several raters, they
did not necessarily have the same meaning.  For example, Weiss' "A+"
"excellent" rating was its top rating.  Best called its "A+" rating
"superior," but it was its second-highest score.  And S&P's "good"
"A+", D&P's "A+", and Moody's "good" "A1" ratings were their
fifth-highest scores. 

Three of the rating agencies--S&P, Moody's, and D&P--divided their
rating scales into two categories labeled "secure" and
"vulnerable."\2 On the basis of their descriptions, we assigned
Weiss' and Best's ratings to these two categories.  Weiss agreed with
our assignment.  Best told us that they were considering revising
their rating scale to conform to the two-category "secure/vulnerable"
designation used by most of the other raters, and that their
empirical analysis had revealed that their "B" and "B-" ratings were
similar to the other agencies' "vulnerable" ratings.  However, Best
did not revise their rating scale for the period they supplied data
for our analysis.  We assigned their "B" and "B-" "good" ratings to
the "secure" category because we believe that a consumer would not
understand a "good" insurer to be "vulnerable."

Rather than attempting to force the various rating designations to
correspond letter rating by letter rating, we assigned them into five
bands based on the similarity of their descriptions.  As shown in
figure I.2, we divided "secure" ratings into three bands, labeled "1"
through "3", and "vulnerable" ratings into two bands, labeled "4" and
"5." Thus, adjacent horizontal cells in figure I.2 contain ratings
whose descriptions we determined were similar.  However, as we
previously noted, the descriptions were not precisely equivalent. 
Thus, these finer distinctions reflect our view of how the different
ratings corresponded.\3

Figure I.3:  Only Weiss Rated More Than Half of All
Life/Health Insurers

Note 1:  Data are for June 30, 1992. 

Note 2:  Percent rated "vulnerable":  S&P 0.2 percent (0.4 percent
asset-weighted); Moody's 0.2 percent (1.5 percent asset-weighted);
D&P 0.0 percent (0.0 percent asset-weighted). 

Note 3:  Our computation of S&P's coverage included only their
Claims-Paying Ability (CPA) ratings and excluded their Qualified
Solvency Ratings (QSR).  Had S&P's QSR ratings been included, their
coverage would have increased to 46.4 percent (96.3 percent
asset-weighted). 

Source:  GAO. 


--------------------
\2 While Moody's and D&P may use different labels such as "investment
grade/noninvestment grade" and "strong/weak", they told us that these
labels have the same meaning as the "secure/vulnerable" labels used
by S&P. 

\3 S&P, Moody's, and D&P told us they intend for their ratings, which
occupy similar positions in their respective scales, to be
equivalent. 


   ONLY WEISS RATED MORE THAN HALF
   OF ALL LIFE/HEALTH INSURERS
--------------------------------------------------------- Appendix I:3

Figure I.3 shows the percentage of life/health insurers rated by each
of the raters, both in number and weighted by asset size.  As of June
30, 1992, we identified 1,963 life/health insurers.  Weiss rated
1,449--over 70 percent of the universe we identified, as compared to
795 rated by Best--about 40 percent.\4 The other three raters covered
12 percent or less each.  However, because S&P, Moody's, and D&P
generally rated the larger insurers, they each covered at least 50
percent of the life/health insurance industry's assets. 

Figure I.3 also shows the division of ratings into "secure" and
"vulnerable" categories.  Although both S&P and Moody's assigned
"vulnerable" ratings, the amounts were generally too small to
register on the charts above. 

   Figure I.4:  Weiss and Moody's
   Assigned Fewer Top Ratings

   (See figure in printed
   edition.)

Note 1:  Data are for June 30, 1992. 

Note 2:  Each agency's results are based on the distribution of
ratings for all insurers rated by that agency. 

Source:  GAO. 


--------------------
\4 Weiss and Best provided some information about but did not rate an
additional 16 percent (0.5 percent asset-weighted) and 29 percent
(3.9 percent asset weighted) of life/health insurers, respectively. 


   WEISS AND MOODY'S ASSIGNED
   FEWER TOP RATINGS
--------------------------------------------------------- Appendix I:4

We compared agencies' distributions of ratings both for (1) insurers
rated by each agency individually and (2) insurers rated in common
between agencies, two agencies at a time.  Because the agencies did
not all rate the same insurers, their rating distributions in the
first comparison are likely to be different.  Indeed, the
distributions from the five agencies differed considerably.  Best's,
S&P's, and D&P's distributions contained proportionately more high
ratings than those of Weiss and Moody's.  Weiss' ratings were
consistent with a normal or bell-shaped distribution, with most of
the ratings falling in the middle of the scale.  However, Best, which
rated fewer insurers than Weiss, but more insurers than S&P, Moody's,
and D&P, had the highest percentage of ratings in the first band. 
Although higher than Weiss, Moody's percentage of its rating
distribution in the first band was lower than that of Best, D&P, and
S&P. 

Figure I.4 shows rating data from June 30, 1992, for insurers rated
by each agency individually.  When the median ratings for the various
raters are placed within the roughly equivalent bands of figure I.2
on page 8, Weiss' median "C-" rating falls in the third band, at the
bottom of the "secure" range, while the other raters' median ratings
fall in the second band, in the middle of the "secure" range. 
Similarly, figure I.4 also shows that Weiss assigned the lowest
percentage of ratings to the higher rating categories, followed by
Moody's.  Other raters assigned ratings in the higher bands two to
nine times more often than Weiss. 

As explained above, some of the variability in the raters'
distributions may be because they did not rate the same insurers.  To
remove this possible source of difference, we also compared the
assignment of ratings between agencies only for insurers they rated
in common, as shown in the next few pages. 

Figure I.5:  Raters Usually Agreed Whether an
Insurer Was "Secure" or "Vulnerable"


   RATERS USUALLY AGREED WHETHER
   AN INSURER WAS "SECURE" OR
   "VULNERABLE"
--------------------------------------------------------- Appendix I:5

We compared the five raters' assignment of ratings to insurers which
they rated in common, comparing two raters at a time.  At the
broadest level, we found that the raters usually agreed on whether
the insurers were "secure" or "vulnerable." Using data from June 30,
1992, we found that they agreed from 89 percent to 100 percent of the
time, depending on which two raters we compared. 

When the raters disagreed about whether an insurer was "vulnerable,"
we found that Weiss was more likely to assign a "vulnerable" rating
than the other raters. 

Figure I.6:  Assignment of Top Ratings:  Weiss vs
the Other Raters

Note 1:  Data are for June 30, 1992. 

Note 2:  "Secure" ratings are contained in the first three bands. 
Shown here are ratings in the first and second bands.  (See page 8,
figure I.2, and page 9 for a definition of the rating bands.)

Note 3:  Information in this chart is based on pairwise comparisons
of ratings for insurers rated in common by Weiss and the other rater. 

Note 4:  The numbers of insurers rated by both Weiss and another
rater on June 30, 1992, are:  781 (Best), 217 (S&P), 78 (Moody's),
and 95 (D&P).  Pairs of bars depict the percentages of these totals
Weiss and the other rater assigned top ratings in the first two
bands. 

Source:  GAO. 


   ASSIGNMENT OF TOP RATINGS: 
   WEISS VERSUS THE OTHER RATERS
--------------------------------------------------------- Appendix I:6

We then used the rating bands from figure I.2, page 8, to further
compare the raters' assignment of ratings to insurers that they rated
in common.  We did this comparison two agencies at a time.  Because
Weiss rated the largest number of insurers and also differed the most
from other raters in assignment of ratings, we show the cases where
Weiss was compared to the other raters in figure I.6.  When the bars
in a pair are of similar height, this indicates that Weiss and the
other rater assigned about the same percentage (and number) of top
ratings to insurers they both rated.  As figure I.6 shows, Weiss and
Moody's assigned about the same percentage of ratings to either the
first band or the first and second bands combined for insurers they
rated in common.  When we reviewed all the pairwise comparisons
between the raters (not shown here), we found that Weiss and Moody's
assigned fewer ratings in either the first band or the first and
second bands than Best, D&P, and S&P. 


RATERS' TIMING IN REPORTING
FINANCIAL VULNERABILITY
========================================================== Appendix II

Figure II.1:  Raters' Timing in Reporting Financial
Vulnerability


   RATERS' TIMING IN REPORTING
   FINANCIAL VULNERABILITY
-------------------------------------------------------- Appendix II:1

To compare raters' timing in reporting financial vulnerability, we
compared when the raters assigned a "vulnerable" rating to
life/health insurers that became financially impaired or insolvent. 
We defined financial impairment or insolvency in the same manner as
state insurance regulators and NAIC.  We included all life/health
insurers that became financially impaired or insolvent between August
31, 1989, and June 30, 1992.  We used the first date a state
insurance regulator took a public action against the insurer as our
benchmark. 

   Figure II.2:  Weiss and Best: 
   Analysis of Impaired Insurers
   Yields 30 Comparison Cases

   (See figure in printed
   edition.)

\a These insurers were excluded from the comparison because Weiss did
not rate life/health insurers prior to August 31, 1989. 

Source:  GAO. 


   WEISS AND BEST:  ANALYSIS OF
   IMPAIRED INSURERS YIELDS 30
   COMPARISON CASES
-------------------------------------------------------- Appendix II:2

We identified 158 life/health insurers that became financially
impaired or insolvent between August 31, 1989, and June 30, 1992. 
Forty were not rated by any of the five raters.  Of the remaining
118, 71 were rated only by one agency, so we could not compare
raters' timing in these cases.  Weiss rated 69 of these 71 insurers
and warned of potential problems by assigning a "vulnerable" rating;
Best rated the other 2 and also assigned a "vulnerable" rating in
both cases.  This left 47 insurers rated by both agencies.  The other
agencies--D&P, Moody's, and S&P--rated, at most, five of the
life/health insurers that became financially impaired or insolvent
during this period.  These five, among the six largest such insurers,
are included in the 47 insurers rated by both Best and Weiss.  We
first compare Weiss' and Best's ratings and then compare all the
available ratings for the six largest insurers (see figure II.5). 

For 17 of the 47 cases rated by both Weiss and Best during our
comparison period, both agencies had assigned "vulnerable" ratings to
the insurers as of August 31, 1989.  Because Weiss did not rate
life/health insurers prior to this date, we excluded these 17 cases
from the Weiss and Best timing comparisons.  This left 30 cases to
compare timing between Weiss and Best. 

   Figure II.3:  Weiss and Best: 
   Who Assigned "Vulnerable"
   First?

   (See figure in printed
   edition.)

Source:  GAO. 


   WEISS AND BEST:  WHO ASSIGNED
   "VULNERABLE" FIRST? 
-------------------------------------------------------- Appendix II:3

Figure II.3 compares Weiss' and Best's timing in assigning a
"vulnerable" rating for the 30 cases they rated in common during our
comparison period.\1 Overall, Weiss was first in 23 cases, Best in 7
cases--about a three to one ratio.\2 In four cases, Best never
actually assigned a "vulnerable" rating.  Instead, Best changed these
ratings from "secure" to one of its "not assigned" categories. 

   Figure II.4:  Weiss and Best: 
   How Much Earlier Was
   "Vulnerable" Assigned?

   (See figure in printed
   edition.)

Source:  GAO. 


--------------------
\1 We constrained our comparison between Weiss' and Best's ratings to
the period from August 31, 1989, to June 30, 1992.  Best rated
several insurers prior to this time, but either discontinued rating
or assigned its "not assigned" designation prior to August 31, 1989. 
If Best did not assign these insurers a rating during our comparison
period, prior to the first public regulatory action, they were
excluded from our comparison. 

\2 If we had placed Best's "B" and "B-" ratings in the "vulnerable"
category, Weiss would still have been first overall.  Weiss'
advantage would have decreased from about three to one to about two
to one. 


   WEISS AND BEST:  HOW MUCH
   EARLIER WAS "VULNERABLE"
   ASSIGNED? 
-------------------------------------------------------- Appendix II:4

We also determined how much earlier a "vulnerable" rating was
assigned by Weiss or Best in the 26 cases where both assigned a
"vulnerable" rating during our comparison period.\3 As figure II.4
shows, Weiss was faster than Best an average of 443 days, about a
year and 3 months, in the 19 cases where Weiss assigned a
"vulnerable" rating before Best.  Best was faster than Weiss an
average of 302 days, about 10 months, in the 7 cases where Best
assigned a "vulnerable" rating before Weiss.  Overall, Weiss assigned
a "vulnerable" rating 242 days, or about 8 months, before Best.\4

   Figure II.5:  When Were
   "Vulnerable" Ratings Assigned
   to Large Insurers?

   (See figure in printed
   edition.)

Note:  na = not rated. 

\a Best never assigned a "vulnerable" rating to Monarch Life.  An "A"
rating was changed to a "not assigned" designation 4 days after the
first public regulatory action. 

\b S&P had assigned a "BBB" rating, its next-to-lowest "secure"
rating, to Monarch Life 184 days prior to the first public regulatory
action.  However, S&P did not assign its "BB" "vulnerable" rating
until 351 days after the first public regulatory action. 

\c S&P never assigned a "vulnerable" rating to Mutual Benefit Life. 
It discontinued rating the insurer July 12, 1991, 1 day prior to the
New York Times report of pending state regulatory action. 

Source:  GAO. 


--------------------
\3 As figure II.3 showed, Best never assigned "vulnerable" ratings in
4 of the 30 cases. 

\4 This average reflects only the timing comparisons in the 26 cases
where both Weiss and Best rated the impaired or insolvent insurers
and assigned a "vulnerable" rating during our comparison period.  We
started the count August 31, 1989.  In 5 of the 7 cases where Best
assigned a "vulnerable" rating first, the actual assignment occurred
prior to the start of our comparison period. 


   WHEN WERE "VULNERABLE" RATINGS
   ASSIGNED TO LARGE INSURERS? 
-------------------------------------------------------- Appendix II:5

Six large life/health insurers, with assets ranging from $1.4 billion
to $13.5 billion, became insolvent or financially impaired between
August 31, 1989, and June 30, 1992.  Weiss and Best rated all six. 
Five out of the six also happened to have been the only life/health
insurers to become financially impaired or insolvent during this time
that were rated by any of the other raters.  S&P rated five, Moody's
rated two, and D&P rated one. 

As figure II.5 shows, Weiss was the first rater to assign a
"vulnerable" rating in five out of the six cases.  The number of days
prior to the first public regulatory action that Weiss assigned a
"vulnerable" rating ranged from a little over a month to a little
less than 2 years.  Moody's was the first to assign a "vulnerable"
rating for Executive Life of California; it assigned this rating 422
days, or approximately 1 year and 2 months, prior to the first public
regulatory action.  Weiss assigned a "vulnerable" rating 379 days,
about a year, prior to the first public regulatory action in this
case.  Best assigned a "vulnerable" rating before the first
regulatory action in only one of the six cases, and this was only six
days before the regulatory action occurred.  In one case, Best
stopped rating the insurer and never assigned a "vulnerable" rating. 
In the remaining four cases, it assigned a "vulnerable" rating only
after the first public regulatory action occurred. 


OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================= Appendix III

We examined private agency ratings of life/health insurers at the
request of Chairwoman Cardiss Collins of the Subcommittee on
Commerce, Consumer Protection, and Competitiveness, House Committee
on Energy and Commerce.  Specifically, our objectives were to (1)
compare the rating systems of the major raters of life/health
insurance companies--Best, D&P, Moody's, S&P, and Weiss, and (2)
determine which raters were first to report the vulnerability of
financially impaired or insolvent insurers. 

To obtain information about life/health insurer ratings and related
studies, we reviewed relevant articles, spoke with insurance experts,
and interviewed representatives from the five major rating agencies. 
We obtained rating information from the raters.\1 Although earlier
rating data was received from most of the raters, we compared ratings
from August 31, 1989, the date Weiss began rating life/health
insurers, to June 30, 1992.  Because (1) results based on data from
one period may not be applicable to a future period and (2) at least
one rater has made changes to its rating scale subsequent to our
analysis, our results are strictly applicable only to the period
analyzed. 

Most of the rating data supplied by Best from their computer data
base did not contain the exact date of rating changes.  To obtain the
dates, as Best suggested, we consulted their published ratings and
press releases, which they also supplied.  Although data from the
other raters also required some preparation and cross-checking, it
was of a lesser degree than that required for data supplied by Best. 

We used NAIC data to determine the universe of existing life/health
insurers, their assets, and unique identification of these insurers. 
However, NAIC could not assure us that its records contained all
life/health insurers because the states do not require all insurers
to file with NAIC.  In addition, because insurers may stop filing
statutory financial reports when they become financially impaired,
NAIC's files may have gaps in financial information.  We interpolated
asset data that was missing from NAIC files.  Although our analysis
assumed insurers' statutory financial data to be comparable, we are
aware that this assumption may not be true in all cases due to
differing state accounting practices. 

We compared the agencies' rating scales, descriptions, and
methodologies, as well as industry coverage and actual ratings for
our analysis period.  We used the raters' descriptions of their
ratings to establish a correspondence among rating levels so that we
could compare the assignment of actual ratings.  We confirmed the
division of ratings into "secure" and "vulnerable" categories with
the raters and noted the cases where they did not use this
characterization. 

We examined the agencies' coverage of the life/health insurance
industry by determining the percentage of life/health insurers they
rated.  This was done by comparing the life/health insurers rated by
a particular agency to the total of life/health insurers, both in
number and weighted by asset size.  We also compared the agencies'
distribution of ratings both for (1) insurers rated by each agency
individually and (2) insurers rated in common between agencies, two
agencies at a time. 

In addition, we compared the raters' timing in reporting the
vulnerability of financially impaired or insolvent insurers by
comparing the date they assigned "vulnerable" ratings to the date the
first public regulatory action was taken.\2 We defined financial
impairment or insolvency in the same manner as state insurance
regulators and NAIC.  We limited our comparison to the period from
August 31, 1989, to June 30, 1992, and constrained the number of days
we credited by starting the count from August 31, 1989.  We removed
from comparison insurers that had a "vulnerable" rating from more
than one rater on August 31, 1989.  In addition, if an agency had
assigned ratings prior to August 31, 1989, but did not rate on or
after this date, we did not use these ratings in our comparison. 
And, finally, if a rater assigned ratings only after the first
regulatory action occurred, we categorized this as "not rated" for
the purpose of our timing comparison.  This had no effect on D&P's,
Moody's, or S&P's results.  However, Best's date of "vulnerable"
assignment was constrained to be no earlier than August 31, 1989, in
the 7 cases where Best was first in assigning a "vulnerable" rating. 
In 5 of these 7 cases, Best assigned a "vulnerable" rating prior to
August 31, 1989. 

In doing this analysis, we tried to take the point of view of
insurance consumers.  By comparing raters' timing in assigning
"vulnerable" ratings to insurers that became financially impaired or
insolvent, we placed the most value on reducing the likelihood that
an insurer would be rated "secure" when it should have been rated
"vulnerable." We realize that this placed less value on reducing the
likelihood that an insurer would be rated "vulnerable" when it should
have been rated "secure."

To do our timing comparisons, we constructed a file of state
regulatory actions against insolvent or financially impaired
life/health insurers.  Because NAIC obtains its information about
insolvent or financially impaired insurers from voluntary reporting
by state regulators, we could not be assured that NAIC's information
was comprehensive.  In fact, we identified a number of such insurers
from other sources--NOLHGA, Best, S&P, and the author of a related
study.\3 In a number of instances, we called individual state
regulators to verify confusing or conflicting information.  In
several cases, we obtained information about additional public
regulatory actions taken against the insurers, in some cases at
earlier dates than we had obtained from previous sources.  Thus, even
though the information we have about public state regulatory actions
is more comprehensive than any of the individual sources we used, we
still cannot be assured that it is fully comprehensive. 

We used the date of the first public action taken by any state
against a financially impaired or insolvent life/health insurer as
the reference point from which we measured a rater's timing in
detecting financial problems.  The earliest type of action contained
in our sample ranged from a cease and desist order to a liquidation
notice.  However, because different states may take the first public
action at different stages of financial impairment, no public action
may be recorded in some states if, for example, an insurer is sold to
or merged with another insurer. 

We did our work between January 1992 and September 1994 in accordance
with generally accepted government auditing standards.  Because we
used information supplied by the rating agencies, we asked them to
review the facts contained in a draft of this briefing report.  We
received responses from Best, Moody's, S&P, and Weiss, who generally
agreed with the factual information presented. 

Best, S&P, and Moody's also provided other comments critical of the
report.  The three agencies pointed out that rating approaches and
philosophies vary among the agencies and that, because of this,
alternative methodologies covering longer periods of time could
produce different results.  We do not disagree.  We did not use data
prior to August 31, 1989, because we were asked to compare all five
rating agencies and Weiss had no ratings prior to that date.  Thus,
we carefully limited our analysis to a description of events that
occurred over a period of slightly less than 3 years.  Our results
are not projectible and should not be construed as applying to any
other time period. 

A second common criticism was that we should have presented the
percentage of life/health insurers in each category that later became
financially impaired.  The agencies believed that this would have
counteracted a tendency in the report to concentrate on (in Moody's
terminology) "Type I' error (too high a rating on a company that
defaults)" rather than "Type II' error (too low a rating on a company
that is financially stronger than indicated by the rating)." In our
timing comparison, we looked only at the ratings of life/health
insurers that became financially impaired.  The period we could use
to compare all five agencies was less than 3 years--August 31, 1989
to June 30, 1992.  We believe that the results of the additional
analysis suggested by the rating agencies would be inconclusive over
such a short time period.  The failure rate of insurance companies
overall is relatively low.  Because the sets of insurers rated by the
agencies vary substantially, the set of institutions rated in common
by all raters is quite small.  Since the numbers of both companies
and associated failures that would be available for comparison are
small, obtaining a statistically valid result would require a longer
sample period than was available to us. 

Finally, S&P believes that we should have included their Qualified
Solvency Ratings in our analysis.  We excluded these ratings because
S&P began their publication in April 1991, so the comparisons we
could have made with other ratings were limited. 


--------------------
\1 In addition to the CPA ratings included in this report, S&P also
publishes three-level QSR ratings.  Because publication of QSR
ratings began in April 1991, the comparisons we could have made with
the other agencies' ratings were limited.  Therefore, S&P's QSR
ratings were excluded from the study. 

\2 In January 1994, Best told us that they were contemplating (1)
changing their rating system to use the "secure/vulnerable"
designation and (2) assigning their "B" and "B-" ratings to
"vulnerable." We reanalyzed the data to see how sensitive our timing
results were to placing Best's "B" and "B-" ratings in either the
"secure" category or the "vulnerable" category. 

\3 Lee Slavutin, "Life Insurance Company Ratings--How Reliable is A. 
M.  Best?" Financial and Estate Planning, Aug.  1991, pps. 
24991-24999, and "Rating Life Insurers:  Can You Really Trust A.  M. 
Best?" Contingencies, vol.  5, no.  1, Jan./Feb.  1993, pps.  36-39. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV


   GENERAL GOVERNMENT DIVISION,
   WASHINGTON, D.  C. 
-------------------------------------------------------- Appendix IV:1

William J.  Kruvant, Assistant Director
Lawrence D.  Cluff, Assistant Director
Christine J.  Kuduk, Economist
Arthur J.  Kendall, Senior Mathematical Statistician
Joanne M.  Parker, Senior Social Science Analyst
George H.  Quinn Jr., Computer Programmer Analyst

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