The rating agency paradox: rewarding those who cut prices…

It is a long-established paradox that the industry’s de facto global regulators – rating agencies AM Best and S&P – use premiums written rather than net exposures relative to capital as a measure of financial strength. The outcome of this approach is that if insurers cut rates in a soft market then the capital models suggest they are over-capitalised while if they increase rates and even cut net exposures this can perversely put pressure on their capital adequacy.