The Financial Health of Insurance Companies: It Matters

October 14, 2020/, /Joy Gänder

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. [3]

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:

YearRating AgencyEMCLiberty MutualWCM/CICCatlin/XLChurch Mutual
2019BestWeissA/StableB-A/StableB-Not RatedC+/CA+/StableCA/StableB
2018BestWeissA/StableB-A/StableBB++/NegativeCA+/StableCA/StableB
2017BestWeissA/StableB-A/StableBB++/StableCA/StableCA/StableB+
2016BestWeissA/StableB-A/StableBB++/StableCA/StableCA/StableB
2015BestWeissA/StableB-A/StableBB++/StableC+A/StableCA/StableB
2014BestWeissA/StableB-A/StableBB++/StableCA/StableC 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

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