Keeping Up with the Joneses: Changing Rating Standards and the Buildup of Capital by U.S. Property-Liability Insurers

Posted: 8 Apr 2003

See all articles by Neil A. Doherty

Neil A. Doherty

University of Pennsylvania - Insurance & Risk Management Department; University of Pennsylvania - Business & Public Policy Department

Richard D. Phillips

Georgia State University - Risk Management & Insurance Department

Abstract

There has been a net propensity over the last decade for the dominant rating agency of the U.S. insurance industry, A.M. Best, to downgrade property-liability insurers. This could reflect a general deteriorating credit worthiness of the industry or an increase in the performance thresholds Best's has deemed necessary to achieve a given rating class. Consistent with a recent study of corporate bond ratings, we find evidence there has been an increase in rating stringency. Specifically, we show pressure for insurers to maintain their existing ratings provides a plausible explanation of the dramatic buildup of capital in the industry during the 1990s. In addition, our analysis suggests Best's raised the bar in terms of the capital required to maintain the highest ratings differentially relative to the increase in standards they required for lower rated categories. The actual pattern of capital buildup across firms in different rating categories is consistent with an attempt by high quality firms to defend these ratings.

Keywords: Insurance, credit ratings, financial strength ratings, capital structure

JEL Classification: G22, G32, G33, M41

Suggested Citation

Doherty, Neil A. and Phillips, Richard D., Keeping Up with the Joneses: Changing Rating Standards and the Buildup of Capital by U.S. Property-Liability Insurers. Journal of Financial Services Research, Vol. 21, No. 1 & 2, 2002. Available at SSRN: https://ssrn.com/abstract=382881

Neil A. Doherty (Contact Author)

University of Pennsylvania - Insurance & Risk Management Department ( email )

Philadelphia, PA 19104-6365
United States
215-898-7652 (Phone)
215-898-0310 (Fax)

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

Richard D. Phillips

Georgia State University - Risk Management & Insurance Department ( email )

P.O. Box 4036
Atlanta, GA 30303
United States
404-413-7009 (Phone)

HOME PAGE: http://robinson.gsu.edu/profile/richard-d-phillips/

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