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Comdex

The Comdex is a composite index based on the ratings received by a company from the ratings services. It is the average percentile ranking for all of the ratings received by a company. As such, it is not another rating, but rather an objective scale that can be used to easily compare the ratings of different companies.

Importance of Ratings
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 on company with another.

The Problem
Unfortunately, the ratings are not easy to understand. The biggest problem is that there is no universal scale that is used by the rating services. Because the 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, although they apply it very differently. The other rating services use the same "triple-A" scale that they use in rating bonds. However, the "triple-A" scale is not an intuitive scale and it is not used consistently among the raters.

There is also the problem of "crossover," where the same letter rating is used by two different raters and has two different meanings. For example, an "A+" from Standard & Poor's or Fitch is the fifth 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
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 than the company. A better way to look at the ratings is to look at the percentiles the ratings represent.

The percentile gives the percentage of insurers that are ranked higher or 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 pecentage 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.

Calculations
The Comdex is based on the ratings issued by the following rating services:

To calculate the Comdex, we first determine the percentiles for each rating service. We start by counting the total number of companies rated by the service. Next we count the number of companies in each rating category. For example, let's take a sample rating service and calculate the percentiles. The Super Rating Service assigns ratings in five categories, A, B, C, D, and E. It has rated a total of 50 companies as shown below. The percentiles would be calculated as follows:

Rating          Companies          Percentile
    A                       5                           100
    B                      10                           90
    C                      15                           70
    D                      10                           40
    E                      10                           20
                            50

We repeat this process and construct a table of percentiles for each of the rating services. Using these tables we can now calculate the Comdex for a given company. We take each rating that the company has received, and look up the percentile in the table for that rating service. Thn we average the percentiles to give the Comdex. A company must have at least two of the four ratings listed above for us to calculate a Comdex.



Last Updated: 9/23/2012 10:05:00 PM