Steven W. Pottier

PROPERTY-LIABILITY INSURER FINANCIAL STRENGTH RATINGS: DIFFERENCES ACROSS RATING AGENCIES

Regulators, investors, consumers, and insurance brokers use insurer financial strength ratings to evaluate the insolvency risk of insurers. This article investigates the factors influencing the decision to obtain a rating or multiple ratings, the determinants of ratings for the three major insurer rating agencies, and reasons for differences in ratings across agencies. This study indicates that insurers obtain ratings to reduce ex ante uncertainty about insolvency risk. It also provides evidence that specific rating determinants and their weights differ across agencies. Evidence of sample selection bias is found only in relation to Bests ratings.

Agency Theory and Life Insurer Ownership Structure

This article uses the insights of agency theory to analyze ownership structures in the life-health insurance industry. We examine operational, financial, and institutional determinants of ownership structure. We simultaneously test hypotheses regarding the owner-manager incentive conflict and the owner-policyholder incentive conflict. Our results demonstrate systematic differences between the activity choices of stock life insurers and mutual life insurers, consistent with the managerial discretion hypothesis. We also find that mutuals are more likely to be licensed in New York, stock firms are more likely to be organized as groups, mutuals are more likely to have high A. M. Best ratings, and older insurers are more likely to be mutuals.

The Effectiveness of Public and Private Sector Summary Risk Measures in Predicting Insurer Insolvencies

This article investigates the abilities of four key summary risk measures to predict property-liability insurer insolvencies. The four summary risk measures studied are the NAICs risk-based capital ratios, the NAICs financial analysis solvency tools (FAST) scores, A.M. Bests Capital Adequacy Relativity ratios, and A.M. Bests ratings. The empirical tests find that the risk measures produced by the private sector are superior in predictive ability to the measures produced by regulators, perhaps because of the qualitative adjustments made by private sector analysts. The results also demonstrate that overall measures of risk are substantially better than risk-based capital measures in predicting insolvencies. Another finding is that the predictive ability of the NAICs RBC ratios can be improved substantially if ranks are used rather than the ratios themselves.

Life Insurer Financial Distress, Best's Ratings and Financial Ratios

This study compares the predictive ability of: (1) ratings, rating changes and total assets; (2) financial ratios; and (3) financial ratios combined with ratings and rating changes on a sample of forty-eight insolvent life insurers over the period 1990 to 1992. Based on the expected cost of misclassification, ratings, rating changes and total assets have comparable predictive ability to financial ratios combined with ratings and rating changes. However, combining ratings and rating changes with financial ratios improves predictive ability compared to financial ratios alone for most cost ratios. Another interesting finding is that adverse rating changes are important predictors of insolvency.

Incentive Contracting and the Role of Participation Rights in Stock Insurers

Corporate limited liability creates incentives for owners to shift risks onto creditors by substituting high-risk assets for low-risk assets because it rewards owners with the benefits of risky activities while penalizing them with only a portion of the costs. However, since rational creditors understand these incentives, the ensuing agency cost is borne ex ante by owners, unless they can credibly precommit themselves not to shift risk onto creditors. This article considers one specific contractual arrangement that helps resolve the risk shifting problem in stock insurers: the inclusion of participation rights in insurance policies. We assume that the insurer chooses between two mutually exclusive investment portfolios, where the riskier portfolio is a mean preserving spread of the less risky portfolio. The primary purpose of this analysis is to demonstrate that participating insurance policies resolve the risk shifting problem for stock insurers. We also present empirical evidence on policyholder participation that is consistent with our theory.

The Determinants of Private Debt Holdings: Evidence from the Life Insurance Industry

Life insurers hold the majority of private debt. Lenders in the private debt market must have the ability to evaluate the credit quality of borrowers and to perform ongoing risk monitoring. The purpose of this study is to examine the determinants of private debt holdings in the life insurance industry. The results suggest that larger insurers, insurers with higher financial quality, mutual insurers, publicly traded insurers, insurers facing stringent regulation, and insurers with greater cash holdings are more prevalent lenders in the private debt market.

The Impact of a Rating Agency's Private Information and Disclosed Causes of Rating Downgrades on Insurer Stock Returns

Existing studies document that bond and insurer rating downgrades are associated with negative abnormal returns but generally do not consider the reasons for the downgrade disclosed or implied in the downgrade announcement. Using hand-collected press releases (downgrade announcements) of A.M. Best Company (Best) for a sample of publicly traded insurance firms during the period 1996–2012, we classify and analyze downgrades based on the disclosed causes of the downgrades and whether the rating agency has implied reliance upon unfavorable private information or opinion. We find that during the three-day event window (−1, +1), rating downgrades overall generate a statistically significant cumulative average abnormal return (CAAR) of negative 7.76%. A significantly more negative CAAR of negative 11.46% is found for “financial-prospects-deterioration” downgrades with the perceived presence of Bests private information or opinion. For downgrades without any indication of Bests private information or opinion, the CAAR is negative 3.35%, which is significantly different from zero but significantly less negative than the CAAR of downgrades where private information or opinion is indicated. Downgrades with reported causes other than deterioration of a firms fundamental financial performance or condition, such as increases in financial leverage and increased business risk taking, produced statistically significant CAAR of negative 3.19% during the (−1, +1) three-day event window, which is also significantly less negative than the CAAR of downgrades where private information or opinion is indicated. Our results provide evidence that downgrades where private information or opinion is likely and downgrades due to a decline in fundamental financial profiles contain more value-relevant information than other types of downgrades.

The Journal of Risk and Insurance: Authors of Influence: The Journal of Risk and Insurance: Authors of Influence

The purpose of our study is to identify the most influential authors who published in the Journal of Risk and Insurance (JRI) between 1989 and 2010 using citations as our primary indicator of author influence. Extant citation studies concerning the JRI are at the journal level rather than the author level or they examine citations appearing in JRI articles rather than citations to JRI articles. Our study examines articles published in the JRI from 1989 to 2010 and the citations to these articles from 1989 to 2014 reported in Thomson Reuters Web of Science (WOS). This approach is consistent with the method used by WOS to calculate journal impact factors. Our study presents a variety of author productivity measures based on JRI publication activity and citations to JRI articles. The top 50 authors are ranked and identified for each metric.