Insurer ratings: The rate debate


With the troubles that have beset Quinn recently, Daniel Dunkley asks whether brokers should take more notice of whether an insurer has a rating or not.

A quick browse through the dictionary will tell you that a 'rating' is defined as "an appraisal of the value of something" or, alternatively, "something to provide a ranking, assurance, and idea of security".

In the insurance industry, and other lines of financial services, ratings are provided by investor services firms to provide clarity on the strength and stability of firms.

The majority of insurers and some brokers operate with a rating, on the proviso of appearing more transparent to prospective customers.

Like so many things, a rating is often only brought to prominence when it is missing, and a recent high-profile example of this has been the case of Quinn Insurance's UK business.

Quinn's attempt at achieving a rating has been a lengthy affair full of twists and turns, which began back in 2003 with its entry to the market.

For several reasons, the Dublin-based insurer stood out from its competitors, not least that it operated with market low premium rates but it also operated without a rating.

In August 2006, the insurer told Post it had no immediate intention to get a rating. Colin Morgan, general manager of Quinn Direct, said at the time: "The security rating is something we are reviewing, but at the moment we feel that there is no need for it, as we are growing the business without it."

Independent assessment
However, a month later came a complete reversal from Mr Morgan, after the firm acquired a Baa2 insurance financial strength rating from Moody's.

Quinn said it was delighted to have "achieved" a rating. "This independent assessment of our financial strength gives us great confidence in our financial position and in our continued ability to continue to grow our business in Ireland, the UK and Europe," a spokesman said.

Skip forward just under two years to July 2008, and the situation changed again. Quinn pulled its rating from Moody's after revealing it had "little chance" of being upgraded, a move that caused a great deal of consternation in the market.

A potted history of Quinn's rating background is a tricky read, to say the least. A number of questions arise from this particular case. Why did Quinn get and then discard a rating? Why are some firms nonchalant on the issue? Does the industry even think a rating is important?

Quinn itself declined to comment on its current position on ratings. However, scanning the market in light of the decision by the Irish financial regulator to put Quinn into administration, industry figures have told Post that greater scrutiny should be placed on unrated insurers.

The rating agencies are also keen to stress their importance. Moody's works with close to 100 medium to large-sized insurance companies, and judges the strength of a firm on criteria ranging from asset quality, product risk, long tail or short tail business, volatile equities, reserve adequacy, financial flexibility, market standing, and profitability.

Simon Harris, team managing director of the insurance group at Moody's, says ratings have a dual purpose for insurers, to attract investment — and gain business from brokers.

He claims ratings will become more important in the post-Solvency II environment: "There are a lot of insurers that are accessing hybrid capital in particular, and this will increase towards Solvency II.

Unusual features
"One of the issues the insurance industry faces is that it isn't well understood and there are a lot of unusual features that make it difficult for capital investors to understand. A rating is a good way for insurers to signal their security to investors. "

He says brokers' security panels view a rating as a key indicator of strength: "From a business perspective, a rating is important to brokers that have security panels, and part of their decision to use an insurer is based on financial strength analysis, and this will be based on the credit rating an insurer has."

One person concerned by the risks posed by unrated insurers is the British Insurance Brokers' Association's head of technical services Peter Staddon, who talks with committed enthusiasm about the dangers that unrated and offshore insurers pose to the UK market.

Biba launched its own insurer rating service in 2007, to inform brokers in "real time" what rating a company had achieved, in conjunction with rating firm Standard & Poor's.

Mr Staddon contends that there is a heightened risk involved with placing business with an unrated insurer — something that could possibly lead to court action.

He stresses brokers must be fully aware of the implications of working with an unrated entity: "What we're saying is that you need to be very careful. I still believe that a broker could be asked serious questions by a court, in the event that they have selected markets for the consumer to choose when they don't have a good credit rating."

"Brokers don't know whether or not the finances of these companies are what they are cracked up to be," he adds

Towergate reveals it refused to place business with Quinn, a decision that led to many price conscious customers placing business with alternative brokers.

Andy Homer, chief executive of Towergate, says this was because it lacked a rating: "There are some clients that chose to go with Quinn despite our advice. We are now ringing them up, and saying, 'would you like to come back to Towergate?'"

"In addition, we have lost business to other brokers that have been using Quinn in the past. We are now contacting these clients and asking them if they are happy with the advice they have been given."

Mr Homer adds that Towergate will not approach the fringe markets to place risks, a move that he feels has been vindicated by the current crisis: "When the Independent went bust in 2001, Towergate had no business with them, and this time round, we have only six Quinn policies, inherited from historic policies."

Fringe markets
"This gives you an indication of what we do with our use of markets. We don't use offshore markets like Gibraltar or Liechtenstein. We deal with strong, credit-rated insurers, and we don't deal with the fringe. We always felt that Quinn was a fringe market," he adds.

Michael Rea, chief executive of Towergate's sister company CCV, agrees that assurance on the stability of an insurer is vital, something he noted from his time at NIG: "We don't work with unrated insurers. We study the financial strength of the insurers that we work with. We will instruct our brokers what insurers they can and can't trade with.

"We go through a thorough process, and if any new insurer came along, we would go through the same assessment process before we decided to trade with them. As long as the financial indicators are positive we will continue to trade with them."

Mr Rea says CCV studies insurers in great detail: "It is critically important that brokers regularly review the credit rating of the insurer they deal with. Most of the information on these companies is readily available, so it ought to be relatively easy to do that. There are lots of accounts and Financial Services Authority returns — a lot of data is available publicly," he adds.

He warns the critical issue facing brokers is whether long-tail liability business will be covered further down the line: "If a client happens to be taking out longer tail cover, it is clearly a question that may be on their minds. When I was at NIG, it is something brokers would raise with us, as they wanted to see what our credit rating was. It is important that brokers offer a choice — limited to insurers with the necessary financial strength."

He suggests brokers need to look to the strength of the companies backing an insurer: "From a broker's perspective, it is important to understand the end strength of an insurance holding company, which is the most important thing."

Mr Rea supports Mr Staddon in the view that brokers have a responsibility to choose wisely: "The responsibility of the broker is to bring choice to the client, and if that involves choosing an unrated insurer, brokers should be making that abundantly clear to their clients."

In April, two of the unrated insurers currently passporting into the UK, Gibraltar-based Thomond Insurance, and Liechtenstein's Gable, refuted allegations that unrated insurers are a riskier, less than reliable choice.

Speaking to Post, Gable chief executive William Dewsall said he did not see a credit rating as an indicator of reputation or reliability: "If the past has taught us anything, a rating is not the only guide to a solid financial company. Solvency, expertise and underwriting protocols are paramount to any insurance company."

Allianz's director of commercial broker markets, Simon McGinn, also believes it is unfair to assume all unrated insurers are riskier propositions: "You cannot assume that insurers that operate without a rating are operating illegally. However, it is hard for the customer to assess what a company is about without a rating."

Mr McGinn suggests that a rating is not a standalone indicator of financial strength, as past experiences have shown: "I'm certain that a rating is not the only way to judge an insurer's financial strength. There were banks that failed that were said to be safe, so it obviously isn't flawless. It is part of the package that brokers and customers consider. It isn't completely infallible, as the Independent, and banking crisis have suggested."

Mr Harris agrees a rating is a strong but not conclusive indicator of financial strength, rather something that can provide assurance to brokers: "Obviously, a rating is not the only way to judge financial strength. A lot of brokers hire their own teams, and a rating is an additional input to that assessment. It depends on the ability of the company to do their own credit assessment. A lot do not have the resource."

Mr Harris, therefore, suggests the underlying responsibility seems to rest with brokers, on sound decision-making ability, as well as evidence.

However, Mr Rea's advice to brokers is simple — use intuition: "If any broker is concerned, they should speak to an insurer and ask them to demonstrate capital adequacy. If you're uncomfortable in the first place, you should perhaps assess whether you should work with them."

Improve transparency
While Mr Staddon suggests a tightening of the regulatory environment in order to improve the transparency of insurers in the market.

He warns that brokers operating in fringe markets face greater uncertainty: "A lot of the bigger brokers will say they don't deal with anyone without a rating. That's fine, because they have security committees, but there are situations where the risk dictates that the conventional markets won't want to cover them."

From an insurer perspective, Mr McGinn says he has seen a recent upsurge in interest on the topic. "From conferences we have been involved in, brokers have said they have been raising the issue more, and also saying it is a subject they talk about, and a subject clients ask about on an unprompted basis.

"There is obviously a degree of caveat in terms of the customer. They can choose to place business with a rated insurer, or one that doesn't have one but there are risks associated with that."

He says Allianz values its own rating as an important signal of the insurer's strength: "From our point of view, we see it as an important asset in our armoury when it comes to competing with other insurers for quality business."

The issue of UK market insurers operating without a rating is far from crystal clear. Insurers and brokers alike seem divided by the necessity of a rating, and how much assurance one provides.

The dilemma of choosing an insurer on price, rather than a solid capital base, is one that recent developments have bought the forefront. The fallout from Quinn, as Mr Rea puts it, has been a "wake up call" to the industry. From brokers, the message is ever cautious — if insurer stability is unknown, brokers are at risk.

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