Rethinking the Use of Credit Ratings in Capital Regulations: Evidence From the Insurance Industry

2020 ◽  
Author(s):  
Kathleen Weiss Hanley ◽  
Stanislava Nikolova
Keyword(s):  
Insurance Industry ◽  
Credit Ratings ◽  
Third Party ◽  
External Financing ◽  
Regulatory Capital ◽  
Mortgage Backed Securities ◽  
Alternative Methodology ◽  
Editorial Decision ◽  
Capital Regulations ◽  
Credit Losses

Abstract We analyze an initiative by insurance regulators to reform capital regulations for mortgage-backed securities (MBS) by replacing credit ratings with third-party estimates of expected credit losses and by considering an insurer’s exposure to future losses when determining regulatory capital. After implementation, insurers are less likely to sell distressed MBS, gains trade corporate bonds, and/or raise external financing. However, the new regime allows insurers to purchase more low-rated MBS at significant capital savings and insurers with greater capital savings are more likely to do so. Our analysis highlights the potential costs and benefits of an alternative methodology for determining regulatory capital. JEL (G11, G18, G22, G28, G32, G38). Received May 6, 2019; editorial decision April 4, 2020 by Editor Andrew Ellul.

scholarly journals CioSy: A Collaborative Blockchain-Based Insurance System

Electronics ◽  
2021 ◽  
Vol 10 (11) ◽  
pp. 1343
Author(s):  
Faiza Loukil ◽  
Khouloud Boukadi ◽  
Rasheed Hussain ◽  
Mourad Abed
Keyword(s):  
Data Storage ◽  
Insurance Industry ◽  
Emerging Technology ◽  
Third Party ◽  
Insurance Companies ◽  
Smart Contracts ◽  
Insurance Policy ◽  
Insurance System ◽  
Advanced Technologies ◽  
Multiple Challenges

The insurance industry is heavily dependent on several processes executed among multiple entities, such as insurer, insured, and third-party services. The increasingly competitive environment is pushing insurance companies to use advanced technologies to address multiple challenges, namely lack of trust, lack of transparency, and economic instability. To this end, blockchain is used as an emerging technology that enables transparent and secure data storage and transmission. In this paper, we propose CioSy, a collaborative blockchain-based insurance system for monitoring and processing the insurance transactions. To the best of our knowledge, the existing approaches do not consider collaborative insurance to achieve an automated, transparent, and tamper-proof solution. CioSy aims at automating the insurance policy processing, claim handling, and payment using smart contracts. For validation purposes, an experimental prototype is developed on Ethereum blockchain. Our experimental results show that the proposed approach is both feasible and economical in terms of time and cost.

scholarly journals Contingent Capital Trigger Effects: Evidence from Liability Management Exercises

2019 ◽  
Vol 8 (2) ◽  
pp. 235-259 ◽  
Author(s):  
Boris Vallée
Keyword(s):  
Time Series ◽  
Cross Section ◽  
Web Site ◽  
Regulatory Capital ◽  
Oxford University ◽  
Contingent Capital ◽  
Liability Management ◽  
Editorial Decision ◽  
Debt Holders ◽  
Published Paper

AbstractThis paper studies liability management exercises (LME) by banks, which have comparable regulatory capital effects than contingent capital triggers. LMEs are concentrated on low capitalization situations, both in the cross-section and in the time series and are frequently associated with equity issuances. These exercises prove effective at improving bank capitalization levels. The market reaction to LMEs is positive and mostly accrues to debt holders. These findings strengthen the case for innovative liabilities securities as a tool to improve bank resilience.Received February 8, 2019; editorial decision May 16, 2019 by Editor Andrew Ellul. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

The Influence of Auditor State-Level Legal Liability on Conservative Financial Reporting in the Property-Casualty Insurance Industry

2012 ◽  
Vol 31 (3) ◽  
pp. 95-124 ◽  
Author(s):  
Jennifer J. Gaver ◽  
Jeffrey S. Paterson ◽  
Carl J. Pacini
Keyword(s):  
Financial Reporting ◽  
Insurance Industry ◽  
State Level ◽  
Third Party ◽  
Forum Shopping ◽  
Legal Concept ◽  
Auditor Liability ◽  
Loss Reserve ◽  
Legal Costs ◽  
Liability Standards

SUMMARY This paper provides the first evidence that state-level liability standards affect auditor behavior. We hypothesize that auditors demand more conservative reporting when their insurance clients are domiciled in states with more stringent standards for third-party claims against the auditor for negligence. To test this hypothesis, we analyze a sample of 3,107 loss reserve observations from 1993 through 2004. Our sample is restricted to private insurers that operate in a single state to control for auditor liability under statutory law and to reduce the possibility of forum shopping by plaintiffs. Consistent with Petroni (1992), we find that financially struggling insurers tend to under-reserve. This behavior is attenuated when the insurer is domiciled in a state that uses either the Restatement of Torts or the reasonable foreseeability standard to determine the auditor's liability to third parties. Compared to the case where the auditor's liability is defined by the legal concept of privity, these standards impose greater legal costs on auditors for ordinary negligence. JEL Classifications: M41; M42; G22; K13.

Part III Investment Banking, 13 Trading Book—Standardized Approaches

2018 ◽  
Author(s):  
Gleeson Simon
Keyword(s):  
Default Risk ◽  
Investment Banking ◽  
Market Risk ◽  
Expected Shortfall ◽  
Capital Adequacy ◽  
Third Party ◽  
Regulatory Capital ◽  
Var Models ◽  
Risk Models ◽  
Basel 3

This chapter discusses trading book models. Risk models come in a variety of types. However, for market risk purposes there have been a number of types which may be used within the framework. The simplest is the ‘CAD 1’ model — named after the first Capital Adequacy Directive, which permitted such models to be used in the calculation of regulatory capital. VaR models, permitted by Basel 2, were more complex, and this complexity was increased by Basel 2.5, which required the use of ‘stressed VAR’. In due course all of this will be replaced by the Basel 3 FRTB calculation, which rejects VAR and is based on the calculation of an expected shortfall (ES) market risk charge, a VaR based default risk charge (DRC) (for those exposures where the bank is exposed to the default of a third party), and a stressed ES-based capital add-on.

scholarly journals Competition and Strategic Incentives in the Market for Credit Ratings: Empirics of the Financial Crisis of 2007

2019 ◽  
Vol 109 (10) ◽  
pp. 3514-3555 ◽  
Author(s):  
Chenghuan Sean Chu ◽  
Marc Rysman
Keyword(s):  
Financial Crisis ◽  
Structural Model ◽  
Credit Ratings ◽  
Mortgage Backed Securities ◽  
Strategic Incentives

We study the market for ratings agencies in the commercial mortgage backed securities sector leading up to and including the financial crisis of 2007–2008. Using a structural model adapted from the auctions literature, we characterize the incentives of ratings agencies to distort ratings in favor of issuers. We find an important equilibrium distortion, which decreased after the crisis. We study several counterfactual experiments motivated by recent policymaking in this industry. (JEL D44, G01, G24)

Earnings Management by Japanese Bank Managers Using Discretionary Loan Loss Provisions

2009 ◽  
Vol 12 (01) ◽  
pp. 1-26 ◽  
Author(s):  
Wikil Kwak ◽  
Ho-Young Lee ◽  
Susan W. Eldridge
Keyword(s):  
Earnings Management ◽  
External Financing ◽  
Regulatory Capital ◽  
Loan Loss ◽  
Loan Loss Provisions ◽  
Bank Managers

This paper investigates Japanese bank managers' use of the discretionary component of loan loss provisions to manage earnings during the recession of the late 1990s. Although studies of US banks document that bank managers use loan loss provisions to smooth earnings, manage regulatory capital, and signal undervaluation, factors that may affect discretionary loan loss provisions in Japanese banks have not been empirically examined. We find that discretionary loan loss provisions for our sample of Japanese banks are positively related to the demand for external financing, realized securities gains, and prior year taxes and are negatively related to capital and pre-managed earnings.

scholarly journals Credit Ratings and the Evolution of the Mortgage-Backed Securities Market

2011 ◽  
Vol 101 (3) ◽  
pp. 131-135 ◽  
Author(s):  
Jie He ◽  
Jun Qian ◽  
Philip E Strahan
Keyword(s):  
Credit Ratings ◽  
Securities Market ◽  
Rating Agencies ◽  
Mortgage Backed Securities ◽  
And Performance

We compare the structure and performance of private (non-GSE) mortgage-backed securities sold by large issuers vs. those sold by small issuers over the period 2000–2006. Securities sold by large issuers have less subordination—a greater fraction of the deal receiving AAA rating—than those sold by small issuers. Prices for AAA-rated and non-AAA rated tranches sold by large issuers fell more when the market turned down than those sold by small issuers, and this difference was concentrated among tranches issued between 2004 and 2006. These results suggest that rating agencies grant favorable ratings to large issuers, especially during market booms.

scholarly journals Protection of personal information: An experiment involving data value chains and the use of personal information for marketing purposes in South Africa

2020 ◽  
Vol 32 (1) ◽  
Author(s):  
Benson Zenda ◽  
Ruthea Vorster ◽  
Adéle Da Veiga
Keyword(s):  
South Africa ◽  
Personal Information ◽  
Insurance Industry ◽  
Direct Marketing ◽  
Third Party ◽  
Insurance Companies ◽  
Short Message ◽  
Prior Consent ◽  
Message Service ◽  
Term Insurance

South Africa enacted the Protection of Personal Information Act 4 of 2013 (POPI) in an effort to curb the misuse of customers’ personal information by organisations. The aim of this research was to establish whether the South African insurance industry is adhering to certain prescripts of POPI, focusing on direct marketing requirements. An experiment was utilised to monitor the flow of personal information submitted to 20 insurance companies requesting short-term insurance quotations, using new e-mail addresses and phone numbers. The results of the experiment indicate that 92% of the marketing communication received did not have prior consent from the researcher. Contact was made by companies outside the sample, indicating third-party sharing. 86% of the unsolicited short message service (SMS) communication received required customers to pay for unsubscribing from SMSs, which is not in line with regulatory requirements. The non-compliance evident in this experiment acts as an early warning to the insurance industry and South Africa, prompting a more concerted effort towards preparation of compliance with POPI. A personal information processing management framework is proposed to aid the insurance industry in understanding how personal information can be processed in line with the requirements of the Act.

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