EPA Study on the Effectiveness of UST Insurance as a Financial Responsibility (FR) Mechanism

Gänder Consulting Group, LLC conducted a study on behalf of the United States Environmental Protection Agency – Underground Storage Tank Office entitled, “The Effectiveness of UST Insurance as a Financial Responsibility (FR) Mechanism,” December 2011.  The purpose of the study was to assess the adequacy and effectiveness of private insurance as a FR mechanism for the UST program.

Analyzing UST pollution insurance policies and evaluating the extent to which they paid corrective action expenses and third-party liability claims associated with releases from regulated USTs, as the EPA intended, was the Study’s focus.

A link to the published EPA Study can be found at:  https://www.epa.gov/ust/epa-study-effectiveness-ust-insurance-financial-responsibility-fr-mechanism

For more information on the Study, please contact Joy M. Gänder, CPCU, ARM, Principal – Gänder Consulting Group, LLC, via email gander@ganderconsulting.com or phone (608) 286-0286.

The Financial Health of Insurance Companies: It Matters

Looking at the financial strength ratings of insurance companies is one way of assessing their long-term ability to pay claims 20 years from now.

The most worrisome long-term liability concern for Wisconsin public school districts is a sexual assault claim involving a minor — not only because of the harm caused to the child involved, but because a civil claim alleging sexual assault can be initiated until the alleged victim turns 35 years old.[1]  Thus, a school district may not even become aware of an incident until decades later.

Currently, there are at least two pending lawsuits against Wisconsin public school districts involving sexual abuse and/or molestation allegations from incidents occurring prior to 2000. If similar allegations are filed against your district, a defense is needed. Will the insurance company you contract with in 2020 be around if or when claims are presented 20 years from now?

The Financial Health of an Insurance Company

All things being equal, how does one assess the financial health of an insurance company? Amongst other things, pay attention to the carrier’s financial strength rating.

Some insurance companies have, and will, become insolvent and unable to pay claims. It happened here in Wisconsin. Legion Insurance Company/Villanova Insurance Company insured several Wisconsin public school districts. When Legion’s financials went south, they went quickly:

  • January 2000 – A.M. Best, a worldwide credit rating agency, assigns an A rating to Legion.
  • January 2001 – A.M. Best decreases Legion’s rating to A-.
  • February 2002 – A.M. Best assigns Legion a B rating with negative implications.
  • April 1, 2002 – Legion is ordered into rehabilitation.
  • July 28, 2003 – Legion is ordered into liquidation.

In 2013, some Legion-insured Wisconsin public school districts received claim reimbursements from the liquidator, though it is unknown whether the payments equaled 100 percent of the claim paid upfront by the school district.  Depending on the class of claim, other districts received nothing. Oddly enough, when Legion was placed into rehabilitation to hopefully regain its financial footing, the company was financially solvent. It is worth repeating: Legion was solvent, but still ordered into rehabilitation.[2]

Even with exceedingly tight budgets, purchasing insurance from the most financially strong carrier absolutely matters; even if at higher premiums.

Will the Wisconsin Insurance Security Fund reimburse us for claims if my carrier is liquidated?

Maybe. But it will take a while to receive the reimbursement, if there is any. Your district may not even be eligible for any reimbursement from the fund if its net worth (“net position” for public entities) is valued at $25 million or more.

How do insurance company financial strength ratings work?

Property and casualty insurance companies often apply for or receive financial strength ratings, which are opinions on carriers’ financial strength and ability to meet ongoing insurance policy obligations, like paying claims.

There are five prominent players in the ratings business: A.M. Best, Weiss, Fitch, Moody’s and Standard & Poor’s. Of these, A.M. Best is the oldest and issues the most financial strength ratings, with Weiss rating the second most.

Obtaining a financial strength rating from Best comes with a price — literally. In return for a fee from the carrier, Best performs quantitative analyses of carriers’ financials, reserving and pricing policies, reinsurance arrangements and capital management strategies. It also conducts qualitative research, usually in the form of interviews with top management, to understand the overall strategic direction of the company.[3]

Weiss issues ratings based solely on publicly available information, and carriers do not pay for the Weiss rating. Weiss’ revenue comes from the consumers and companies who buy the ratings. Per the U. S. General Accounting Office, “Weiss places far less reliance than the other agencies on analysts’ judgement.”[4]

Are ratings from credit rating agencies equivalent to one another?

No.  An A- from Best is not the same as an A- from Weiss or Fitch.

Best, Weiss and Fitch all use letter grades, with or without pluses or minuses, but the distribution of comparable ratings between them is different.

Approximately 72 percent of the carriers rated by Best receive an Excellent (A-) to Exceptional (A++) rating. Weiss ratings tend to distribute more moderately with only 35 percent of companies receiving a rating comparable to the same Best category.[5]  Weiss is known as the “hard” grader and is usually one full letter grade below Best (e.g., a carrier with an A- rating from Best will likely receive a B- rating from Weiss). Fitch’s BBB is comparable to Best’s A- rating.[6]

What ratings are acceptable?

“Most commonly, rating users (insurance buyers and those employing contractors, bond underwriters, etc.) employ a minimum ‘A-’ rating standard. Stated another way, rating users will place insurers on their “approved” list if they are rated A- or higher, and leave the companies off their approved list if rated below A-.”6

As noted above, however, an A- rating from one organization is not the same as an A- from another.

Even so, all other things being equal, an A- from Best or B- from Weiss are often the minimum ratings acceptable to, and recommended by, most independent risk management consultants (those who do not sell insurance) and international, national and regional insurance agents and brokers.

Locally, the University of Wisconsin System requires its universities to contract with vendors that carry insurance with a company rated no less than A- by Best.[7]

Why fret over ratings as long as you choose one in the secure range, which for Best begins at B+?

Rating agencies divide their ratings into two general groups: secure and vulnerable.

Best’s secure group begins with a B+ rating and goes up by five more levels to A+++.  Insurance agencies and brokerages usually set the minimum acceptable rating bar at no less than A- on the Best scale.

Although a B+ or B++ rating is considered secure, over a 15-year period, companies with those ratings have impairment rates nearly double of companies rated A or A-.[8]

Weiss’ secure group starts at C- and improves from there.

Insurers rated at the bottom of the secure range are more likely to fall into the vulnerable range and are more likely to become impaired or insolvent.[2]

What if a carrier doesn’t have a current rating from Best?

 Do your homework and gather information:

  • If a carrier doesn’t have a rating from Best, ask the carrier why and obtain the response in writing.
  • If a carrier had a rating from Best, but withdrew from the rating process, ask:

   –  How many years did the company have a Best rating?

   –  What were its ratings the last five years a rating was issued?

   –  What year did the company withdraw from Best’s rating process?

   –  Why did it withdraw from Best’s rating process?

   Request these responses from the carrier and in writing.

  • Obtain the carrier’s Weiss ratings, and review its combined ratio history. A combined ratio considers a carrier’s premiums (money in) divided by losses and expenses (money out). A ratio of 100 or more means the carrier is losing money on its operations.

Ask bidding agents to provide in writing the last five year-end combined ratios for the carriers offering to insure your district. Are there discernible trends?

Financial strength ratings for insurance companies insuring Wisconsin public school districts.

Noted below are the current and historical financial strength ratings and outlook from Best and the ratings from Weiss as of December 31, 2019, for carriers currently insuring most Wisconsin public school districts:

Year Rating Agency EMC Liberty Mutual WCM/CIC Catlin/XL Church Mutual
2019 Best

Weiss

A/Stable

B-

A/Stable

B-

Not Rated

C+/C

A+/Stable

C

A/Stable

B

2018 Best

Weiss

A/Stable

B-

A/Stable

B

B++/Negative

C

A+/Stable

C

A/Stable

B

2017 Best

Weiss

A/Stable

B-

A/Stable

B

B++/Stable

C

A/Stable

C

A/Stable

B+

2016 Best

Weiss

A/Stable

B-

A/Stable

B

B++/Stable

C

A/Stable

C

A/Stable

B

2015 Best

Weiss

A/Stable

B-

A/Stable

B

B++/Stable

C+

A/Stable

C

A/Stable

B

2014 Best

Weiss

A/Stable

B-

A/Stable

B

B++/Stable

C

A/Stable

C

 

B

A Word About Policyholder Surplus

Policyholder surplus is a carrier’s financial cushion to pay claims and expenses beyond what was contemplated in premiums. It is a measurement of how many unexpected losses the insurer can absorb. Wisconsin’s Office of the Commissioner of Insurance reviews carriers’ policyholder surplus to ensure statutory adequacy.

Ask carriers offering to insure your district to provide a five-year history of their net written premiums to policyholder surplus ratio. The lower the ratio of net written premiums to policyholder surplus, the more financial cushion the company has to pay for unexpected or catastrophic situations.

Summary

Deciding which property and casualty insurance company to buy from can have potentially devastating financial implications on your district 20 years from now, so buying from financially stable carriers is recommended.

Have bidding agents do the homework for you by obtaining the following information from bidding insurance companies. For the current and last five years:

  • A.M. Best and Weiss Ratings. If no A.M. Best rating exists, ask the questions noted above.
  • Year-end combined ratios.
  • History of the carriers’ net written premium to policyholder surplus ratio.

For questions, review and interpretation of ratings and ratios, call Joy Gänder, CPCU, ARM, principal, (608) 286-0286, Gänder Consulting Group, LLC.

______________________________ 

[1] Wis. Stats. §893.587 and §948.095.

[2] In Re: Villanova Insurance Company (In Liquidation), No. 1 VIL 2002, “Liquidator’s Final Accounting, Plan for Final Distribution, and Application for Approval of Notice – Exhibit B,” Filed 10/31/18, Commonwealth Court of Pennsylvania, https://www.insurance.pa.gov/Regulations/LiquidationRehab/Documents/Villanova/VILLANOVA_JAN_17_2019_EXHIBITS_B_AND_C_TO_FINAL_ACCOUNTING_FOR_DISTRIBUTION.pdf.

[3] Tom Stephenson, “The Value of (or problem with) Rating Agencies,” Robus Research, July 5, 2013, <http://www.robus-risk.com/the-value-of-or-problem-with-rating-agencies/>.

[4] William J. Kruvant et al., “Insurance Ratings – Comparison of Private Agency Ratings for Life/Health Insurers,” (GAO/GGD-94-204BR Insurance Ratings), United States General Accounting Office, Briefing Report to the Chairwoman, Subcommittee on Commerce, Consumer Protection, and Competitiveness Committee on Energy and Commerce House of Representatives, September 1994, <http://www.gao.gov/products/GGD-94-204BR>.

[5] The Weiss Approach ©2003, <www.WeissRatings.com>.

[6] “Not All Insurer Financial Strength Ratings Are Created Equal,” White Paper on Lack of Comparability of A.M. Best’s ‘A-‘ IFS Ratings to Those of Fitch, Fitch Ratings, July 2016, <https://www.fitchratings.com/site/insurance/ifsratings>.

[7] See University of Wisconsin System information at <https://www.wisconsin.edu/risk-management/manual/vendor-certificates/>.

[8]Best’s Impairment Rate and Rating Transition Study – 1977 to 2014,” Best’s Special Report – U.S. Property/ Casualty & Life/Health, Trend Review, August 21, 2015, <http://www.ambest.com/nrsro/FormNRSRO_Ex1_RatingsImpairment.pdf.>.

 

By Joy M. Gänder, CPCU, ARM

Copyright © 2020 Gänder Consulting Group, LLC

Phone: (608) 286-0286 │Fax: (608) 442-6811

Hacks, Ransomware and Breaches – Oh My!

Even though I’m a techie neophyte, I began writing this article by jotting down a few general ideas and, in no time flat, I had a list nearly a page long. The subject of risk management and computer security, breaches and hackings is that extensive.

So, let’s start with the basics. Cyber threats (“exposures,” in risk management lingo), are internal and external, intentional and unintentional.

Selecting a Nearly-Infallible Machine: Insurance Company Ratings

Imagine needing a machine to work 365 days per year, 24/7.

Imagine the machine must fulfill a specific purpose for no less than three years, and may be called upon to perform certain tasks, which cannot be duplicated by any similar or replacement machine, for 20 years after the initial three. Machine breakdowns are unacceptable and such failures have grave financial and reputational implications for you on a professional and personal level.

Good Risk Management Can Cut Insurance Costs

“Rumors were circulating at Carol’s wholesale business that the sales manager, Tom, was interested in “getting involved” with Christa, the firm’s new salesperson. Christa, on the other hand, had turned down many of Tom’s offers, but Tom’s ego would not let him relent. Carol is concerned Christa will leave, and worse yet, initiate legal action against the business. The company is already working on a thin profit margin, and Carol knows she cannot afford the legal expenses from this or any other sexual harassment claim. What should she do?”

The Impact of an Employee’s Dishonesty: When 1 + 1 Does Not = 2

Store 13* had increased its sales each month since opening a year and a half ago. Some increases were as much as 23 percent over previous months. Now, all of a sudden, sales were flat and in some cases, lower than before. Home office personnel inquired with the manager, “Have any new convenience stores opened […]

Fiduciary Liability = Your Personal Assets at Risk

The phrase “fiduciary liability” is probably familiar to you in the context of corporate directors and officers, and their fiduciary responsibilities to a company. However, there is another type of fiduciary liability which many suggest is equally, if not more, important.

Who is a Fiduciary?

The Employee Retirement Income Security Act of 1974 (ERISA) classifies individuals providing, involved and/or charged with developing, administering and overseeing a company’s benefit or welfare employee benefit plans as fiduciaries. These include plan administrators, trustees, company officers and directors, and human resource personnel. In academic terms, a fiduciary is “any person/organization who has discretionary authority over the administration or management of a plan or its assets.” This includes exercising authority.

Temps, Leased Employees and Borrowed Employees:
What’s the Difference and Why Should I Care?

Have you used or do you use temporary help (“temps”), leased employees or borrow employees? Here are a few workers’ compensation insurance and risk management-related items to keep in mind.

Companies’ workforces may consist of people who are direct employees, temps, leased employees or borrowed help. What’s the difference? For the purposes of this article:

Cyber Risk & Insurance

This article examines the issue of cyber risk and exposures to loss, including recent legal and legislative developments. It reviews and discusses the options for cyber insurance coverage and the coverage limitations of such policies and endorsements. The article also explains the first and third party exposures to loss that cyber insurance covers as well as other benefits of cyber insurance. To highlight the impact of cyber breaches and the benefits of cyber insurance, this article examines recent cyber breaches, including the cyber breaches at Target and Home Depot. The purpose of this article is to provide guidance to legal practitioners and other professional advisors regarding potential cyber risk exposures.

Renewing Your Property & Casualty Insurance: The Scales Have Tipped

In late 2001 through 2003, property and casualty insurance premiums were increasing and businesses tried to mitigate the potential adverse impact of these higher rates. Back then, the insurance market was “hard” or a seller’s market. Fast forward to 2007; the scales have now tipped back to a “soft” insurance market, a.k.a., a buyer’s market. Happy days are here again, right? Well, before jumping to conclusions, take a few minutes and consider what these lower prices might really mean.