INSURER INSTABILITY
Never before has selecting a financially secure insurance company been such a game of chance. Insurance company ratings have been plummeting and once prominent and financially secure companies are falling by the wayside. In what was once a slow process, insurance companies now seem to fall from grace within months of initial press reports about their declining financial condition. Policyholders are often left with little or no time to find replacements for their failing insurer and, in today's constricting marketplace, there may not always be another, stronger insurer available to step in and save the day.
Risk transfer through the purchase of insurance has been a longstanding risk management technique, but now that technique may have a greater risk in and of itself than the risk of loss that it was selected to treat. What then are insurance buyers to do when it comes to selecting an insurance company?
There are various rating organizations available to consumers to confirm the financial wherewithal of commercial insurance companies. Of course, drawing a conclusion based on only one rating organization's assessment may not always be prudent, yet trying to compare the ratings of the various organizations for any given insurer could prove to be a daunting task. Nevertheless, you cannot underestimate the value of credible financial information on insurance companies. It is vital that you collect as much information as possible to make an informed decision on the selection of the insurers with whom you decide to do business.
There are five prominent rating organizations, A.M. Best Company, Inc., Standard & Poor's, Moody's Investor's Service, Fitch Ratings and Weiss Ratings, Inc., that can be consulted. Looking at an insurer's rating by only one of these rating organizations may not be enough because each organization's approach to rating insurers is different. From time to time, this will result in different ratings of the same insurer by the respective rating organizations. On March 31, 2003, for the purpose of this article, a comparison was made of the rating for one insurance company (a medium sized P&C insurer headquartered in New Jersey) by each of the five major organizations.
A.M. Best rated the company A+, its second highest "Secure Best's Rating." There are a total of six "Secure Best's Ratings." Standard & Poor's gave the same company a Financial Strength Rating of A, its third highest "Secure" rating of four secure rating categories. Similarly, Moody's gave this insurer a rating of A2. This is Moody's third highest "Secure" rating and the "2" modifier places it in the middle of the "A" category ("1" being the highest and "3" being the lowest). Fitch's rating of this insurer, "A," also fits in the middle of their third highest Secure rating category. Weiss Ratings Inc. takes a much different approach and rates this same insurer C+. Although this is Weiss's third highest rating they indicate that "C" rated insurers may encounter difficulties in maintaining their financial stability during an economic downturn. Weiss admits to taking a much more conservative approach to the rating of insurers and sets itself apart from the other rating organizations by not accepting any money from insurers and not allowing insurers to stop or influence publication of the ratings.
When evaluating an insurer, insurance buyers will be well served to view the ratings of an insurer by two or more of the rating organizations. Recognizing that Weiss will likely be the most conservative, insurers that are not rated favorably by Weiss and one or more of the others are likely to be unacceptable. With the exception of ratings by Weiss, these organizations provide their ratings online, free of charge. Always keep in mind that these ratings are typically "snapshots" at a given point in time and will not always reflect the most recent financial condition.
You can find additional information on various state insurance department web sites. Also, the National Association of Insurance Commissioners (NAIC) web site contains their Insurance Regulatory Information System (IRIS) designed to provide state insurance departments with a means to screen and analyze the financial condition of insurance companies. While perhaps intended for the more advanced analyst, some of the ratios can be calculated to aid in the evaluation of a prospective insurer.
There are also many electronic/online services that will provide easy access to insurance industry news, including information on insurance company financial concerns, rating changes, or updates. While any one of these sources is not enough to form an opinion, using multiple sources will provide the data needed to make an informed decision in the selection of an insurance company. As the insurance marketplace becomes smaller, due diligence in the selection of an insurer becomes more important with each passing month.
-- Charles H. Cox
Vol. XVI, No. 2
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As you all know, this has been a particularly tough "hard market" period in the insurance industry. And not just from the standpoint of insureds. Insurance companies have been faltering, retrenching and going under. The latest to succumb was the Kemper group that once portrayed itself as the cavalry coming to the rescue of the insured. Other insurers are picking over the pieces of Kemper, but it appears no one will be coming to its rescue. In this issue, Charlie Cox looks at some of the services that rate the financial stability of insurance companies in an effort to avoid those that may be in trouble. But keep in mind that, as late as last October, Kemper was touting itself as an "outstanding, financially stable" source for coverage and nobody was contradicting them. And in his latest industry critique, Mike Coyle points out where the system itself may be in danger of failing. We would like to thank everyone who responded to the questionnaire in the last issue about receiving Analysis & Comment electronically. It was heartening to see how many of you regularly read this newsletter. For those of you who did not take the opportunity to tell us what you thought of the idea last time, we are including another copy of the questionnaire with this issue. --- Ed.
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