United States General Accounting Office

September 1994

INSURANCE RATINGS

Comparison of Private Agency Ratings for Life/Health Insurers

GAO/GGD-94-204BR

United States
General Accounting Office
Washington, D.C. 20548

General Government Division

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

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 Appendix 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 Appendix 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 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. (Appendix 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.

 

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

¹As 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.

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