The city of Jacksonville is about to enjoy the benefits of a credit rating boost. Moody’s Investors Service moved the Florida city’s credit rating to Aa2 from Aa3, citing pension reform among the main reasons for the upgrade. The credit rating increase will allow the state to borrow funds at a lower interest rate and invest in more infrastructure and public services.
Five years ago, the Jacksonville City Council approved a pension reform package while enacting innovative changes, reducing debt by more than $585 million and adding over $155 million to pension reserves. A key element of the pension reform that led to reduced debt was closing the city’s three pension plans to new public employees in 2017. Since that change was put in place, over $715 million has been used to grow Jacksonville’s economy and invest in public services for its population. In addition, credit rating agencies, such as Moody’s, assign “grades” to governments’ ability and willingness to service their bond obligations, taking into consideration the jurisdiction’s economic situation and fiscal management. Since the pension reform reduced budgetary pressure, it improved the chances of the city getting a credit upgrade.
Peru, Chile and Bolivia have allowed early withdrawals from their funds as a source of relief for households and to support recoveries during the pandemic and the global price shock. But these have had negative financial and confidence ramifications, contributing to downgrades of Peru in 2021 and Chile in 2020. Longstanding private pension funds have been important supports for sovereign creditworthiness where they exist in Latin America.
Peru’s Congress approved a sixth withdrawal from private pension funds in May. Prior rounds due to the pandemic led to withdrawals of USD17.8 billion or 8% of 2021 GDP. In Chile, a fourth withdrawal proposal failed in April 2022, but Chileans have already withdrawn about USD50 billion (16% of 2021 GDP) in 2020-2021. Bolivia allowed early withdrawals once in 2021 for more limited amounts (0.4% of 2021 GDP).
The goal of this paper is to equip actuaries to proactively participate in discussions and actions related to potential racial biases in insurance practices. This paper uses the following definition of racial bias: Racial bias refers to a system that is inherently skewed along racial lines. Racial bias can be intentional or unintentional and can be present in the inputs, design, implementation, interpretation or outcomes of any system. To support actuaries and the insurance industry in these efforts, this paper examines issues of racial bias that have impacted four areas of noninsurance financial services — mortgage lending, personal lending, commercial lending and the underlying credit-scoring systems — as well as the solutions that have been implemented in these sectors to address this bias. Actuaries are encouraged to combine this information on solutions and gaps in other industries with expertise in their practice areas to determine how, if at all, this information could be applied to identify potential racial biases impacting insurance or other industries in which actuaries work. Parallels can be drawn between the issues noted here in financial services and those being discussed within the insurance industry. While many states have long considered race to be a protected class which cannot be used for insurance business decisions, regulators and consumer groups have brought forth concerns about potential racial bias implicit in existing practices or apparent in insurance outcomes. State regulators are taking individual actions to address potential issues through prohibition of certain rating factors, and even some insurers are proactively calling for the industry to move away from using information thought to be correlated with race. However, this research suggests that government prohibition of specific practices may not be a silver-bullet solution. Actuaries can play a key role as the insurance industry develops approaches to test for, measure and address potential racial bias, and increase fairness and equality in insurance, while still maintaining riskbased pricing, company competitiveness and solvency.
Author(s): Members of the 2021 CAS Race and Insurance Research Task Force
The most important new development in the past two decades in the personal lines of insurance may well be the use of an individual’s credit history as a classification and rating variable to predict losses. However, in spite of its obvious success as an underwriting tool, and the clear actuarial substantiation of a strong association between credit score and insured losses over multiple methods and multiple studies, the use of credit scoring is under attack because there is not an understanding of why there is an association. Through a detailed literature review concerning the biological, psychological, and behavioral attributes of risky automobile drivers and insured losses, and a similar review of the biological, psychological, and behavioral attributes of financial risk takers, we delineate that basic chemical and psychobehavioral characteristics (e.g., a sensation-seeking personality type) are common to individuals exhibiting both higher insured automobile loss costs and poorer credit scores, and thus provide a connection which can be used to understand why credit scoring works. Credit scoring can give information distinct from standard actuarial variables concerning an individual’s biopsychological makeup, which then yields useful underwriting information about how they will react in creating risk of insured automobile losses.
Author(s): Patrick L. Brockett and Linda L. Golden
Publication Date: originally 2007
Publication Site: jstor, The Journal of Risk and Insurance
Cite: Brockett, Patrick L., and Linda L. Golden. “Biological and Psychobehavioral Correlates of Credit Scores and Automobile Insurance Losses: Toward an Explication of Why Credit Scoring Works.” The Journal of Risk and Insurance, vol. 74, no. 1, 2007, pp. 23–63. JSTOR, http://www.jstor.org/stable/4138424. Accessed 22 May 2022.
S&P Global Inc. should “carefully consider” a proposed tweak to how it assesses the creditworthiness of bonds owned by insurance companies, the Justice Department said, warning that such a change “could raise significant concerns” under U.S. antitrust law.
The Justice Department’s antitrust division said in a letter dated last Friday that a proposed methodology change by S&P — the world’s largest credit ratings company — could raise barriers for its rivals. The changes could end up hurting the credit grades of insurance companies that invest in bonds that aren’t rated by S&P.
The firm should “carefully consider whether penalizing insurers that purchase securities rated by S&P’s competitors has the potential to raise barriers to entry and expansion by competitors, insulate S&P from competition, or otherwise suppress competition from rival rating agencies,” said antitrust chief Jonathan Kanter in the letter. “Such actions could raise significant concerns that the Sherman Act has been — or will be — violated and warrant additional scrutiny.”
This paper proposes a quantitative theory of the interaction between private and public debt in an open economy. Excessive private debt increases the frequency of financial crises. During such crises the government provides fiscal bailouts financed with risky public debt. This response may cause a sovereign debt crisis, which is characterized by a higher probability of a sovereign default. The model is quantitatively consistent with the evolution of private debt, public debt, and sovereign spreads in Spain from 1999 to 2015, and provides an estimate of the degree of overborrowing, its effect on the spreads, and the optimal macroprudential policy.
US CMBS loan defaults declined significantly in 2021 compared with 2020, as the resumption of economic activity supported a recovery in asset performance and property cash flows from their pandemic lows, says Fitch Ratings in its US CMBS 2021 Loan Default Study. The total annual default rate for Fitch-rated CMBS transactions declined to 0.4% in 2021, down from 3.3% in 2020.
Author(s): Stephanie Duski, Melissa Che, Everett Bruer, Sarah Repucci
Pressley, alongside Senate Majority Leader Chuck Schumer (D-NY), and Senator Elizabeth Warren (D-MA) have repeatedly called on Biden to cancel $50,000 in student loan debt immediately via executive order on the premise that there is sufficient legal backing for the administration to do so.
The Fed researchers, using data from the New York Fed/Equifax Consumer Credit Panel, estimated the cost of two federal loan forgiveness proposals, one for $10,000 and another for $50,000. They found that limited forgiveness and placing income caps on who would be eligible would “distribute a larger share of benefits” to low-income borrowers while also reducing the cost of forgiveness.
Rep. Pressley has repeatedly stressed that women and people of color hold significant levels of student loan debt and that cancellation would represent a massively impactful form of relief given the disproportionate burden.
Global sovereign debt is expected to climb by 9.5% to a record $71.6 trillion in 2022, according to a new report, while fresh borrowing is also broadly set to remain elevated.
In its second annual Sovereign Debt Index, published Wednesday, British asset manager Janus Henderson projected a 9.5% rise in global government debt, driven primarily by the U.S., Japan and China but with the vast majority of countries expected to increase borrowing.
Global government debt jumped 7.8% in 2021 to $65.4 trillion as every country assessed saw borrowing increase, while debt servicing costs dropped to a record low of $1.01 trillion, an effective interest rate of just 1.6%, the report said.
However, debt servicing costs are set to rise significantly in 2022, climbing around 14.5% on a constant-currency basis to $1.16 trillion.
Blackstone loves managing assets for insurers, but it has no interest in assuming a large amount of investment risk itself.
Blackstone Executives talked about the skin-in-the-game idea Thursday, during a conference call the company held to go over first-quarter earnings with securities analysts.
Patrick Davitt, an analyst with Autonomous Research, asked Blackstone executives Thursday about reports that some insurance regulators have concerns about independent money managers’ role in handling insurers’ investments.
“Some observers have suggested that an outcome of these reviews could be a requirement of more skin in the game for the managers, particularly those that aren’t consolidated with their insurance counterparties,” Davitt said. “So, first, what is your position on this focus? Do you think there’s a risk that regulators will require more skin in the game?”
Total Russian and Ukraine sovereign and corporate debt was $813.3 million at year-end 2021, representing 97% of total exposure; the remainder comprised $28.8 million in stocks (see Table 2). While life companies accounted for the majority of the bond exposure at $683.9 million (or 84% of total Russia and Ukraine bonds), property/casualty (P/C) companies accounted for almost all the Russia and Ukraine stock exposure at $28 million. About 90% of U.S. insurers’ exposure to Russia and Ukraine bonds and stocks was held by large companies, or those with more than $10 billion assets under management.
Author(s): Jennifer Johnson, Michele Wong, Jean-Baptiste Carelus
Publication Date: 14 Apr 2022
Publication Site: NAIC Capital Markets Special Reports