Lerner L.G., PhD Pavlov R.A., Mudrenko A.A.

Oles Honchar Dnipropetrovsk National University

IMPERFECTIONS IN INSURANCE COMPANIES’ RATING ASSESSMENT SYSTEMS USED BY NATIONAL AND FOREIGN RATING AGENCIES AND SOME PROPOSALS AS FOR THEIR ELIMINATION

Since there is a fierce competition among life insurance companies, clients need objective information about their financial performance to make economically sound decisions regarding cooperation with insurance companies. To obtain such information it is necessary to classify insurance companies, which can be implemented with the help of their ratings. Insurance companies’ ratings allow any customer to compare and evaluate the financial performance of insurance companies without independent analysis of their activities.

Nowadays the best-known international rating agencies in the insurance industry are the Standard & Poor's, Moody's Investor Service, AM Best, Fitch IBCA.

First of all, let’s consider the drawbacks of the international rating systems to assess the national insurance company. The international rating agencies above all assess external risk factors and unfavourable conditions for the company while estimating the industry and operating environment specificity. Customer loyalty to the company and the position of rivals are evaluated as well. But such features of the national market as political conditions, the social environment instability, the openness and the accessibility of information that enables customers to choose freely among the number of insurance companies which operate on the market and reinsurers to create the necessary conditions (because they are largely depend on the availability of data on the assignor’s activities and underwriting and losses) are not taken into account. The majority of the international rating agencies develop their own methodologies, taking into account a high degree of the insurance and financial markets development in the region. These markets aren’t developed enough in Ukraine, and thus the data on the rating will be distorted to some extent [6].

During the qualitative assessment of the insurance company special attention is paid to the internal risk factors and possible conflict of interests between the owners of the company’s essential shares. The evaluation of these indicators, as well as the quality of the company management, the relationship between the employees and the management, between the company and the contractors are necessary to study and the internal information, which is inaccessible to most people, has to be analysed as well. In addition, it enables companies to distort the existing situation in order to improve their own rating.

The company’s quantitative evaluation based on the international rating methodology focuses on the status of assets, investment and operational risks. The main emphasis is on the company’s investment policy, its ability to achieve a balance between the risk level and the assets profitability. However, the investment projects in the Ukrainian markethave a rather high risk level at a very high profitability level. Therefore, analyzing the composition and the structure of assets, taking into account the risk level and return on investment in the national market, it is necessary to change the median coefficients at different rates and actually develop a new model. Also, the foreign methodology uses as a basis for calculating profit before tax, amortization and dividends (EBITDA), which is significantly higher than the net profit used by the national methodology, and therefore the result of profitability and profit calculations for the same parameters consequently will be arithmetically smaller. However, if the company has had actual net losses in the current period, it will have less impact on the overall rating, and therefore this calculation method distorts it to some extent [5].

The disadvantages of the domestic rating methodologies primarily are due to the fact that the insurance companies themselves order rating estimates to raise their own image in the eyes of potential customers. In this case, an insurer has an opportunity to dictate his own terms to the rating agencies and to distort the rating estimation [4].

All national methodologies are based on State Commission of Financial Services Markets Regulation methodology, and it almost does not take into account the risks that arise during the insurance company activity. A detailed analysis of the market and the environment does not take into account the external risk factors that are dependent neither on the sphere of activity nor the competitors’ and creditors activity.

Although a qualitative analysis of the company using the national methodology is very deep and multifaceted, it is still subjective. In fact, the domestic rating agencies analyze all aspects of the insurance company activities, even those that are unimportant in ranking creation. In addition, there is a repetition of the same indicators at different stages of evaluation, which increases their weight and, consequently, the overall company rating.

The indicators that are used in the quantitative analysis according to the national methodologies are not consistent with the international standards. As noted above, theindicators are calculated using quite a different methodology, and hence the index value will be different. The quantitative analysis of insurance companies is based on the techniques of the financial analysis and the financial management. When the risk component of the investment is determined, the risk component of the company’s generated capital is not evaluated, the influence of the external factors such as inflation, political situation, creditors status and activities, stock and currency markets dynamics, etc. are not taken into account, the quality of the capital management is estimated as a quality indicator and doesn’t play a significant role when the insurer receives a rating [6].

The reinsurers’ activity is not covered enough. The insurer's dependence on the reinsurance is estimated, but reinsurance companies’ dependence on the insurance company activities and the availability of public access to important information (data about the losses and risks) are not considered.

It’s necessary to eliminate certain shortcomings in the existing national methodologies so as to make the insurance company rating objective, realistic and comparable to the international one. To solve this problem, we propose to do the following:

1) to carry out a gradual transition to the international financial reporting standards, which will make it possible to compare domestic and foreign insurers activities;

2) to make the process of the insurance company rating transparent and its results – public. This will make the process of rating available and clear to the potential insurance companies clients, and the rating will have more confidence with the population;

3) to create a state control over the quality of a fixed-rated insurance company. This step will prevent abuses by the insurer and reduce pressure on the rating agencies from the customers of the rating assessment;

4) to settle the legal requirements regarding the scope of reinsurance and to develop on its basis the independent rating system of the individual companies that are engaged exclusively in reinsurance activities;

5) to develop a national system for the insurance company rating, which will include quantitative and qualitative data about the company, the market evaluation and the general region condition (country, world), which will create a legislative framework and methodology to unify the rating. This measure also follows from the necessity of the legislative regulation of rating agencies and rating assignment procedure;

6) to develop a ranking system that will be based solely on the public information, and as a result the insurer won’t be able to conceal information or distort the evaluation results. This measure will make the assigning ratings procedure more transparent and clear for the insurance services consumers.

Literature:

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