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For-profit rating agencies, models examined at PCI.

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Byline: Meg Fletcher

SCOTTSDALE, Ariz.-Illinois Insurance Director Michael McRaith discussed the role rating agencies have played in the current economic crisis with restraint, but his disapproval of rating agencies' "stealth regulation'' was apparent.

He predicted that the current system of for-profit rating agencies would be replaced by nonprofit entities that are more independent of the insurers they rate and freer of other marketplace pressures.

"I want to see an independent, nonprofit rating agency only for the insurance industry,'' Mr. McRaith said at the Property Casualty Insurers Assn. of America's annual meeting in Scottsdale, Ariz.

He also said the call to establish such an entity would be made in the coming months.

Mr. McRaith made the call as he and four other panelists-representing two rating agencies, an insurer and an actuarial firm-discussed The Impact of Risk Models and Rating Agencies as part of a PCI panel during last month's meeting.

The insurance industry has relied on modeling analytics to "to help it function efficiently,'' said panel moderator Regis Coccia, editor of Business Insurance.

Financial models attempt to take reality and represent it through a series of mathematical or statistical equations so analysts can study the effects of risks, said Roosevelt Mosley Jr., principal and consulting actuary with Pinnacle Actuarial Resources Inc. in Bloomington, Ill. Predictive models also can be used, for example, to estimate future claims or pricing.

Rating agencies analyze an insurer's capital models to determine data quality and reserve...

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