UnitedStatesGeneral

Accounting

OfficeGAO

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

September

INSURANCE RATINGS

1994‘Comparison of Private
Agency Ratings for
Life/Health Insurers

GAO/GGD-94-2!04BR

GAO

United States
General Accounting Offlee
Washington, D.C. 20548
General Government Division
E258206

September 29,1994
The Honorable Cardiss Collins
Chairwoman, Subcommittee on Commerce,
Consumer Protection, and CompetitivenessCommittee on Energy and Commerce
House of Representatives
Dear Chairwoman Collins:
Private rating agencies are in a position to play an important role inproviding 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 therating 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), andWeiss Research (Weiss) over the period August 31,1989, to June 30, 1992,
and (2) determines which raters were first to report the vulnerability offinancially impaired or insolvent insurers.

Results in Brief

Insurer ratings could not be easily compared across the five rating
agencies because they did not all use the same approach and methods torate insurer financial health. Rating scales and descriptions of ratingsvaried by agency and over time. Weiss placed far less reliance than theother agencies on analysts’ judgment. Coverage differed-Weiss was the
only agency to rate more than half of all insurers. Finally, Weiss andMoody’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/healthinsurers; between them, they rated the majority of financially impaired
life/health insurers. Weiss’ ratings reflected financial vulnerabiity first

three times more often than Best in the cases we compared. On average,
Weiss’ ratings reflected financial vulnerability 8 months earlier than Best1The other agencies-D&P, Moody’s, and S&P-rated, at most, five of thelife/health insurers that became financially impaired during ourcomparison period. These five, among the six largest such insurers, werealso rated by Best and Weiss. Weiss was the first to assign avulnerable
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‘As further explained in appendix III, we placed a limit on the number of days we credited by startingthe count from the day Weiss first published life/health insurer ratings.

Page I

GAO/GGD-04-204BR Insurance RatingsIfirst to reflect financial vulnerability for these six insurers. In four of thesecases, Best did not assign a vulnerable rating unGl 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.

Scope and
Methodology

To obtain information about life/health insurer ratings and related studies,
we reviewed relevant articles, spoke with insurance experts, andinterviewed representatives of the five major rating agencies publishinglife/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) tocompare the agencies’ rating scales, descriptions, and methodologies, aswell as industry coverage and actual ratings, We used data from August 31,
1989, to June 30, 1992. August 3 1,1989, was the date Weiss first publishedlife/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, andmethodology.)
We did our work between January 1992 and September 1994 in accordancewith generally accepted government auditing standards. We asked therating 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 inappendix III.
As agreed with your office, unless you publicly announce the contents ofthis report earlier, we will not distribute it until 7 days after the date of thisletter. 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.

Page2

GAO/GGD-94-204BB insurance Ratings

Please contact me on (202) 5 12-8678 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

Page 3GAOIGGD-94-204BB Insurance 3atinga

Contents

LetterAppendix I
Comparison of Rating
Systems

Appendix II
Raters’ Timing inReporting Financial
Vulnerability

Ratings Could Not Be Easily Compared
Rating Scales Differed
Only Weiss Rated More Than Half of All Life/Health Insurers
Weiss and Moody’s Assigned Fewer Top Ratings
Raters Usually Agreed Whether an Insurer Was “Secure” or“Vulnerable”
Assignment of Top Ratings: Weiss Versus the Other Raters

Raters’ Timing in Reporting Financial Vulnerability
Weiss and Best: Analysis of Impaired Insurers Yields 30
Comparison Cases
Weiss and Best: Who Assigned “Vulnerable” First?
Weiss and Best: How Much Earlier Was ‘%lnerable” Assigned?
When Were “Vulnerable” Ratings Assigned to Large Insurers?

Appendix III
Objectives, Scope,and Methodology
Appendix IV
Major Contributors toThis Report
Figures

6
6
9
11
13
16
17
18
19
21
23
25
27
28

General Government Division, Washington, D. C.

Figure I. 1: Ratings Could Not Be Easily Compared
Figure 1.2: Rating Scales DifferedFigure 1.3: Only Weiss Rated More Than Half of AU Life/He&h
Insurers
Figure 1.4:Weiss and Moody’s Assigned Fewer Top Ratings
Figure I.5: Raters Usually Agreed Whether an Insurer Was%ecure” or “Vulnerable”
Figure 1.6: Assignment of Top Ratings: Weiss vs the Other Raters
Figure II. 1: Raters’ Timing in Reporting Financial Vulnerability
Figure 11.2:Weiss and Best: Analysis of Impaired Insurers Yields
30 Comparison Cases

Page 4

32
32

6
8
10
12
14
16
18
20

GAOKiGD-94-204BB Insurance Ratings

Figure II.3: Weiss and Best: Who Assigned ‘Vulnerable” First?
Figure II.4: Weiss and Best: How Much Earlier Was “Vulnerable”
Assigned?
Figure lI.5: When Were “Vulnerable” Ratings Assigned to Large
Insurers?

22
24

;

26

Abbreviations
I

CPA
NAK
NOLHGA

QSR

Page 6Claims-Paying Ability
National Association of Insurance Commissioners
National Organization of Life and Health Guaranty
Associations
Qualified Solvency Ratings
GAOIGGD-94-204BR Insurance Ratings

IAppendix I

Comparison of Rating Systems

Figure 1.1: Ratings Could Not Be Easily ComparedGAO Ratings Could Not Be Easily Compareda Rating scales and descriptions

variedl

Weiss placed less reliance on analysts’
judgment than other ratersa

Coverage differed-only
most insurersaDistributions varied-Weiss andMoody’s assigned fewer ratings at the
top of their scales than other raters

Ratings Could Not Be
Easily Compared

Weiss rated

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 rateinsurer financial health during the period of our analysis.

Page 6

GAO/GGD-94-204BB

Insurance Eatings
Appendix I

The rating agencies used different symbols and numbers of ratings in theirrating 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.l Even the same letter rating within one rater’ssystem may have had a different meaning at two points in time. During thetime that we did our work, Best changed its rating system twice, bothadding 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 %ecure/vulnerablenclassification used by most of the other raters.
All rating agencies, with the exception of Weiss, said that they placed agreat 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 ratingprocess. In contrast, while Weiss used judgment to create and modify themathematical model that it used to determine the ratings, Weiss did notuse judgment to assess management or to alter the results produced by themodel 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, theyeach 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 andMoody’s were less likely than the other raters to assign insurers their top
ratings.

‘Although D&P’s full description for “A+* was similar to that of S&P, D&P didnot use a single word
descriptor similar to S&P’s ugood.”

Page 7GAOKGD-94-204BR

Insurance

RathgnAppendixI

Figure 1.2: Rating Scales Differed

GM

Rating Scales Differed

Rating agencies
RatingBands

Weiss aBest a?b

Moody’sD&P

secure1

A+. A. A-

A++. A+

Aaa

AAA

2

B+, 8, B-

A, A-

AA+, AA, AA-

Aal, Aa2, Aa

AA+, AA, AA-

3c+, c, c-

B++, B+
B, B-

A+, A, ABBB+, BBB, BBB-

Al,A2,A3
Baa1 , Baa2, Baa3

A+, A, ABBB+, BBB, BBB-

4

D+, D, D-

C++, c+,c,c-BB+, BB, BBB+, B, B-

Bal, Ba2, Ba3
81, B2, B3

BBC, BB, BE
B+, 6, B-

5E+, E, EFD

ccc,

Caa, Ca, C

E, F

Ph R

ccc+,
DD

Vulnerable(CC, C)

ccc,“Weiss and Best use additional symbols to designate that they recognize an insurerk
but do not provide a rating. These symbols are not included in this table.

ccc-

existence

bt3est 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.
cS&P discontinued

CCC ‘I+” and “-’ signs, CC, C, and D ratings, and added the R rating in 1992.

?

Source: GAO.

Page 8GAO/GGD-94-204BR

Insurance Ratinga
AppendixIii

Rating Scales Differedratings 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 notnecessarily have the same meaning. For example, Weiss’ “A+” “excellent”
rating was its top rating. Best called its “A+” rating “superior,” but it wasits second-highest score. And S&P’s “good” UA+n,D&P’s “A+“, and Moody’s“good” “Al” ratings were their fifth-highest scores.
Three of the rating agencies-S&P, Moody’s, and D&P-divided theirrating scales into two categories labeled “secure” and ‘%ulnerable.“2 On thebasis of their descriptions, we assigned Weiss’ and Best’s ratings to thesetwo 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 weresimilar to the other agencies’ “vulnerable” ratings. However, Best did notrevise their rating scale for the period they supplied data for our analysis.
We assigned their ‘Bn 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 tocorrespond letter rating by letter rating, we assigned them into five bands
based on the similarity of their descriptions. As shown in figure 1.2, we
divided %ecure” ratings into three bands, labeled “1” through “3”, and“vulnerable” ratings into two bands, labeled “4” and “5.” Thus, adjacenthorizontal cells in figure I.2 contain ratings whose descriptions wedetermined were similar. However, as we previously noted, thedescriptions were not precisely equivalent. Thus, these finer distinctions
reflect our view of how the different ratings corresponded.3

2While 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 “secur&ulnerable” labels
used by S&P.
%2&P,Moody’s, and D&P told us they intend for their ratings, which occupy similar positions in theirrespective scales, to be equivalent.

Page 9GAO/GGD-94-204BR

Inmrance Ratings
Appendix I

Figure 1.3: Only Weiss Rated More Than Half of All Llfs/Heaith lnsurenr

GAO Only Weiss Rated More Than Half of
All Life/Health Insurers
100

Percent rated

90
80
70
60
50
40
30
20
10
0

Asset-weighted

1

1 secure
Vulnerable

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.

Page10GAOIGGD-94-20aBRInsnranceEstinee
Appendix1

Only Weiss Rated
More Than Half of All
Life/Health Insurers

raters, both in number and weighted by asset size. As of June 30,1992, we
identified 1,963 lifekalth insurers. Weiss rated 1,449-aver 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 1.3 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.

‘Weiss and Best provided some information about but did not rate an additional 16 percent(0.6 percent asset-weighted) and 29 percent (3.9 percent asset weighted) of life/health insurers,
respectively.

Page 11GAOIGGD-94-204BR

lnsumnce Ratinga
Appendix I

1IIFigure 1.4: Weiss and Moody’s Assigned Fewer Top Ratings

GAO Weiss and Moody’s Assigned Fewer
Top Ratings
Percent of ratings asslgned at the top of the scale
Rating agency

Median ratingBand 1

Bands 1 812

Weiss

C-

4%

23%

Best

A

35%

65%

S&P

AA

29%

81%

Mooch’s

Aa

10%

55%

D&P

AA

24%

84%

Note 1: Data are for June 30. 1992
Note 2: Each agency’s
agency.

results are based on the distributionof ratings for all insurers rated by that

Source: GAO.

Page 12GAO/GGD-@4-204BR hunmace RatAppendix I

Weiss and Moody’s
Assigned Fewer Top
Ratings

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 thesame insurers, their rating distributions in the first comparison are likely
to be different. Indeed, the distributions from the five agencies differedconsiderably. 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, withmost 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, andD&P, had the highest percentage of ratings in the first band. Althoughhigher than Weiss, Moody’s percentage of its rating distribution in the firstband 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 eachagency individually. When the median ratings for the various raters areplaced within the roughly equivalent bands of figure 1.2 on page 8, Weiss’
median “G” 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.

Page 13

GiAO/GGD-94-204BB Insurance Ratings
Appendix I

2

Figure 1.5: Raters Usually Agreed Whether an Insurer Was “Secure” or “Vutnerable”

GAO Raters Usually Agreed Whether an
Insurer Was “Secure” or “Vulnerable”
lRaters agreed from 89% to 100% of
the time when placing insurers in“secure” or “vulnerable” categorieslWhen raters disagreed, Weiss
assigned “vulnerable” ratings
more often

E

Pftge 14GAOIGGD-94-204BR

Insurunce RatInga
Appendix I

Whether an Insurer
Was “Secure” or“Vulnerable”

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,” wefound that Weiss was more likely to assign a “vulnerable” rating than theother raters.

Page 16

GAOIGGD-94-204BR

Insurance Rathgs
Appendix
I

I
P
1

Figure 1.6: Assignment of Top Ratings: Weiss vs the Other RatersGALOAssignment of Top Ratings:
Weiss vs the Other Raters
100

Percent top ratings

90

a0
70
60
50
40
30
20
10
0

Weiss vs other raters

1st & 2nd bands

1st band

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 firstand second bands. (See page 8, figure 1.2, and page 9 for a definition of the rating bands.)
Note 3: Information in this chart is based on pairwise comparisonscommon by Weiss and the other rater.

of ratings for insurers rated in

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

Page 16

GAOIGGD-94-294BB

Inmrance
Eutinga
Appendix I

I

Assignment of Top
Ratings: Weiss Versus
the Other Raters

the raters’ assignment of ratings to insurers that they rated in common. We
did this comparison two agencies at a time. Because Weiss rated thelargest number of insurers and also differed the most from other raters inassignment of ratings, we show the cases where Weiss was compared tothe other raters in figure 1.6.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 combinedfor 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 andsecond bands than Best, D&P, and S&P.

Page 17

GAO/GGD-94-204BB

Insurance Ratinga
Appendix I

Appendix II

Raters’ Timing in Reporting F’inancial
Vulnerability
Figure 11.1:Raters’ Timing in Reporting Financial Vulnerability~0

Raters’ Speed in Reporting
Financial Vulnerabilityl

We compared raters’ timing in
assigning “vulnerable” ratings prior
to the first public regulatory action#population: all life/health insurersthat became impaired or insolvent
8/31 I89 - 6/30/92#benchmark: the first date a state
insurance regulator took a public
actionPage 18

GAO/GGD-94-204BR

Insurance Ratinga
Appendix IIRaters’ ‘lkn-ing inReporting Financial
Vulnerability

To compare raters’ timing in reporting financial vulnerability, we
compared when the raters assigned a ‘vulnerable” rating to life/healthinsurers that became financially impaired or insolvent. We defined
fmancial 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.

Page 19

GAO/GGD-94-204BR

humrmce
Ratings
AppendixLI

Figure 11.2:Weiss and Best: Analysis of Impaired Insurers Yields 30 Comparison Cases

GAO Weiss and Best: Analysis of Impaired
Insurers Yields 30 Comparison Cases
Total of insolvent or financially impaired Ilfe/health Insurers

158

Not rated

-40

Rated
Rated only by Best
Rated only by Weiss

118
- 2
- 69

Rated by both Weiss and Best
Rated “vulnerable ’ by both Weiss and Best on 8/31/89 a

47
- 17

Weiss vs Best comparison

cases“These insurers were excluded from the comparison
insurers prior to August 31, 1989.

30

because Weiss did not rate life/health

Source: GAO

Page 20GAOIGGD-94-204BR

Insurance Ratinga
AppendixII-1

Weiss and Best
Analysis of Impaired
Insurers Yields 30
Comparison Cases

We identified 158 life/health insurers that became financially impaired orinsolvent 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 7 1 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 otheragencies-D&P, Moody’s, and S&P-rated, at most, five of the life/healthinsurers that became tinancially 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 iirst compare Weiss’ and Best’s
ratings and then compare all the available ratings for the six largest
insurers (see figure ES).
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 asof August 31, 1989. Because Weiss did not rate life/health insurers prior tothis date, we excluded these 17 cases from the Weiss and Best timing
comparisons. This left 30 cases to compare timing between Weiss andBest.

Page 21

GAO/GGD-94-204BR

Insurance Ratings
AppendixIIFigurs 11.3:Weiss and Best: Who Assigned “Vulnsrable”

M

First?

i

Weiss and Best: Who Assigned“Vulnerable” First?
Did both assign “vulnerable”

ratings?

Weiss firstBest first

Yes

19

7

26

No -- only one

4

0

4

Total

23

7

30

Source: GAO,

Page 22GAOKGD-94-204BB

Ineuratkce Ratin@
Appendix IIWeiss and Best Who
Assigned “Vulnerable”
FM!?

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.’ 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 tierable”
rating. Instead, Best changed these ratings from %ecure” to one of its “notassigned” categories.

‘We constrained our comparison between Weiss’ and Best’s ratings to the period from August 31, 1989,
to June 30,199Z. Best rated several insurers prior to this time, but either discontinued rating or
assigned its “not assigned” designation prior to August 31, 1969.If Best did not assign these insurers arating during our comparison period, prior to the first public regulatory action, they were excluded
from our comparison.

I

qf we had placed Best’s “B” and ‘B-P 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.

Page 23

GAO/GGD-94-204BR

Insurance Ratings
Appendix II/I
1

Figure 11.4:Weiss and Best: How Much Earlier Was “Vulnerable”

Assigned?

MC) Weiss and Best: How Much Earlier
Was “Vulnerable” Assigned?

Number of insurers towhich both assigned
a “vulnerable” rating

Number of days agency assigned
a “vulnerable” rating before
other agency
Range

Mean

Weiss first

19

42 to

1040

443

Best first7

26 to 749

302

Mean advantage
Weiss over Best

242

Source: GAO

Page 24

GAO/GGD-94-204BR hmrance Ratinga
Appendix II:.

Weiss and Best How
Much Earlier WaS“Vulnerable”
Assigned?

by Weiss or Best in the 26 cases where both assigned a “vulnerable” rating
d-king our comparison period.3 As figure II.4 shows, Weiss was faster thanBest 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 fasterthan 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!

3As figure II.3 showed, Best never assigned “vulnerable” ratings in 4 of the 30 cases

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 6 of the 7 cases where Best assigned a “vulnerable” rating first,
the actual assignment occurred prior to the start of our comparison period.

Page 26GAOIGGD-94-204BB

Ratinga
Appendix II

Insurance:

Figure 11.5:When Were “Vulnerable”

Ratings Assigned to Large Insurers?

GA13 When Were “Vulnerable” Ratings
Assigned to Large Insurers?
Number of days rater assigned a “vulnerable” rating
before ( - ) or after ( + ) first public regulatory action
Executive
Life of CA

Executive
Life of NY

First
CapitalMonarchBankers

MutualBenefit

Weiss

- 379

- 372

- 308

- 617

- 162

-40

Best

-

+

f

+

S&P

- 190

na

Moody’s

- 422

na

na

na

na

D&P

-

na

na

na

na

Ratingagencies6

41

1Fidelity

2

5+ 351 b

-3

-6

+

a

3
C

+

2
na

Note: na = not rated.
%est never assigned a “vulnerable” rating to Monarch Life. An “A” rating was changed
assigned” designation 4 days after the first public regulatory action.

lo a “notbS&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 Ihe first public regulatory action.
“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

Page 26GAOIGGD-94-204BR

Insurance Ratings
Appendix IIWhen Were
“Vulnerable” Ratings
Assigned to Large
Insurers?

$13.6 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 fmt rater to assign a “vulnerable”
rating in five out of the six cases, The number of days prior to the firstpublic 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 firstto assign a Vulnerable” rating for Executive Life of California; it assigned
this rating 422 days, or approximately 1 year and 2 months, prior to thefirst 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 tierable”
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 neverassigned a “vulnerable” rating. In the remaining four cases, it assigned a“vulnerable” rating only after the first public regulatory action occurred.

Page 27GAWGGD-94-204BR

Insurance Eatlngs
Appendix IIAppendix III

Objectives, Scope, and Methodology

We examined private agency ratings of life/health insurers at the request of
Chairwoman Cardiss ColIins 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 firstto 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, andinterviewed representatives from the five major rating agencies. We
obtained rating information from the raters.’ 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 tothe 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 Bestsuggested, 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/healthinsurers, their assets, and unique identification of these insurers. However,NA.IC could not assure us that its records contained all life/health insurers
because the states do not require aJl 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 financiaI data to becomparable, we are aware that this assumption may not be true in allcases 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‘In addition to the CPA ratings included in this report, !3&Palso publishes three-level QSR ratings.
Because publication of QSR ratings began in April 1991,the comparisons we could have made with theother agencies’ ratings were limited. Therefore, S&P’s QSR ratings were excluded from the study.

Page 28

GAO/GGD-94-204BR Insurance Ratings
Appendix III

among rating levels so that we could compare the assignment of actual
ratings. We confirmed the division of ratings into %ecure” 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 wasdone by comparing the life/health insurers rated by a particular agency tothe 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 incommon between agencies, two agencies at a time.
In addition, we compared the raters’ timing in reporting the vulnerabilityof 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 samemanner as state insurance regulators and NAlC. We limited our comparison
to the period from August 31,1989, to June 30,1992, and constrained thenumber of days we credited by mg
the count from August 341989.
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 thisdate, we did not use these ratings in our comparison. And, finally, if a rater
assigned ratings only after the fust regulatory action occurred, wecategorized this aa “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 thanAugust 341989, 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 3 1, 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 themost value on reducing the likelihood that an insurer would be rated“securen when it should have been rated “vulnerable.” We realize that thisplaced 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 N&S information was comprehensive. In fact, we
identified a number of such insurers from other SOUKeS-NOLHGA,
Best,% January 1994,Best told us that they were contemplating (1) changing their rating system to use the‘securekulnemble” designation and (2) asigning their ‘B” and “E” ratin@ to “vulnerable.” Wereanalyzed the data to see how sensitive our timing results were to placing Best’s ‘8” and ‘B-” ratingsin either the %ecure” category or the ‘vulnerable” category.

Page 29

GAO/GGD-94-204BR Insurance Ratinga
Appendix IIIs

S&P, and the author of a related studys3 In a number of instances, wecalled 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, eventhough the information we have about public state regulatory actions ismore comprehensive than any of the individual sources we used, we stillcannot be assured that it is fully comprehensive.
We used the date of the first public action taken by any state against afinancially impaired or insolvent life/health insurer as the reference pointfrom which we measured a rater’s timing in detecting financial problems.
The earliest type of action contained in our sample ranged from a ceaseand desist order to a liquidation notice. However, because different states
may take the frrst 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 accordancewith generally accepted government auditing standards. Because we used
information supplied by the rating agencies, we asked them to review thefacts 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 thereport. The three agencies pointed out that rating approaches andphilosophies 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 asapplying to any other time period.
A second common criticism was that we should have presented thepercentage of life/health insurers in each category that later became
financially impaired. The agencies believed that this would havecounteracted 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 isfinancially stronger than indicated by the raring).” 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 fiveagencies 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%e 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.

Page 30

GAO/GGD-94-204BR

Insurance Rathgs
Appendix III

insurers rated by the agencies vary substantially, the set of institutions
rated in common by all raters is quite small. Since the numbers of bothcompanies 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.

sF’inally, 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 havemade with other ratings were limited.

jPage 31

GAO/GGD-94-204BB

Insurance Ratings
Appendix III

TAppendix IViMajor Contributors to This Report

General Government
Division, Washington,
D. C.

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@W34)

Page 32

GAO/GGD-94-204BR

Insurance Ratings
Appendix IV

1

Ordering~_” Information

The first copy of each GAO report and testimouy
is free.
Additional
copies are $2 each. Orders should be sent to thefollowing
address, accompanied by a check or money ordermade out to the Superintendentof Documents, whennecessary. Orders for 100 or more copies to be mailed to asingle address are discounted 25 percent.
Ordersby mail:

U.S. General Accounting
OfficeP.O. Box 6015
Gaithersburg,
MD 20884-6015
or visit:
Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting
OfficeWashington,
DC
Orders may also be placed by calling (202)or by using fax number (301) 258-4066.

512-6000Each day, GAO issues a list of newly available reports andtestimony.
To receive facsimile copies of the daily list or any
list from the past 30 days, please call (301) 258-4097 using atouchtone
phone. A recorded menu will provide informationon
how to obtain these lists.

PRINTED ON &&RECYCLED

PAPERUnited States
General Accounting
OfficeWashington,
D.C. 2064%OOOi
Official
PenaltyBusiness
for Private

Use $300

Address

Correction

Requested

Bulk Mail
Postage & Fees Paid
GAO
Permit No. GlOO