The Comdex Solution
Ratings have become one of the most important pieces of information
about a life insurance company. Ratings provide a convenient reference
point from which to judge the financial health of a company. Ratings
also provide a way to compare one company to another.
Unfortunately, ratings are not easy to understand. The biggest
problem is that there is not a universal scale used by the rating
services. Because rating services, in essence, are competing with
each other, each service tries to differentiate itself from the
others. Two services use the " A through F" scale that we used in
school. However they do apply it very differently. The two other
rating services use the same "triple-A" scale that they use in rating
There is also the problem of "crossover," where the same
letter rating is used by two different rating companies and
has two different meanings. For example, and "A+" from Best
is the second highest rating that can be assigned, and is
not considered an excellent rating. Comparisons of letter
ratings between the rating services are useless.
| The Solution to the Problem
In order to clear up this confusion, it is necessary to take a
step back from the letter ratings themselves. The actual letter
rating that is assigned to a company is not as important as the
number of companies that are rated higher or lower then the company.
A better way to look at the ratings is to look at the percentiles
that the ratings represent. The percentile gives the percent of
insurers that are ranked lower than a given company. If a company
is in the 80th percentile, 20% of the companies are ranked higher
and 80% are ranked lower. This is the common way of reporting test
results for most national student testing. When considering a large
number of students, the absolute test score is not as important
as the percentile, the percentage of students that scored better
and the percentage of students that scored worse.
We calculate a composite index, the Comdex, which is the average
percentile of a company's ratings. The Comdex is not a rating itself.
It is a composite of all of the ratings that the company has received.
The Comdex gives the company's standing, on a scale of 1 to 100,
in relation to other companies that have been rated by the services.
It is an objective value based solely on the mathematical distribution
of all of the companies that have been rated.