Ratings that out-do the regulators - how they work

In rating an insurance company's financial strength, Standard & Poor's aims to go beyond the scope of the regulators, who want to be sure that a life insurer is strong enough to meet claims under its policies, with the associated costs of running the operation. The rating company's approach is to look ahead to the medium and longer terms to assess whether a company is likely to remain strong enough to operate effectively in the market place".

The ratings given to life insurers are designed to be consistent with the ratings given to other companies, whether or not they are in insurance, or the debt ratings of municipalities and sovereign states. This means that an AA life insurer rating should give the same degree of confidence an AA-rated debt issue has. A German company rated AAA should have the equivalent strength in its market to a similarly rated US company in its own country.

There are two types of rating, depending on the extent to which the company being rated works with S&P. Where there is an 'interactive' arrangement, the insurer provides five years' worth of reports and accounts, statutory returns and a wide range of other information, including investment details and strategic projections for three to five years.

After an extensive review of the company and the factors affecting its operations, the analysts discuss with the insurer's management the initial findings. The company is then given its rating, determined by a committee of S&P analysts, with an explanation of the reasoning underpinning it. There is an opportunity to appeal the particular rating and challenge the rationale. Subsequently, the finalised rating is published and undergoes continuous monitoring. The interactive ratings are reviewed annually.

Where the company does not co-operate with S&P in the provision of information, it will be rated on publicly available information, such as the accounts, both statutory and company issued, press releases and so on. The insurer will be asked to submit any extra information it feels will be relevant to the exercise. But, S&P says, "no information of a confidential nature is taken into account in the analysis". A committee decides on the rating and the insurer is notified and presented with the rationale. In response the insurer can provide additional information before a final decision is taken.

Most of the ratings covered in this the first report onEuropean life insurers are based on publicly available information. They are designated with the letters 'pi' after the ratings.

Insurer Financial Strength Ratings

An insurer rated BBB or higher is regarded "as having financial strengths characteristics that outweigh any vulnerabilities and is highly likely to have the ability to meet financial commitments".

AAA: Insurers so rated have Extremely Strong financial characteristics.

AA: Insurers so rated have Very Strong financial strength characteristics, with only slight differences to AAA-rated companies.

A: Insurers so rated have Strong financial strength characteristics, but are somewhat more likely to be affected by adverse business conditions than are insurers with higher ratings.

BBB: Insurers so rated have Good financial strength characteristics, but are more likely to affected by adverse business conditions than more highly rated companies.

An insurer rated BB or lower is seen as having vulnerable characteristics that may outweigh its strengths. So BB indicates the least degree of vulnerability and CC the highest.

BB: An insurer so rated has Marginal financial strength characteristics. Positive attributes exist, but adverse business conditions could lead to insufficient ability to meet financial commitments.

B: An insurer so rated has Weak financial strength characteristics. Adverse business conditions are likely to impair its ability to meet financial commitments.

CCC: An insurer so rated has Very Weak financial security characteristics and is dependent on favourable business conditions to meet financial commitments.

CC: An insurer so rated has Extremely Weak financial strengths and is likely not to meet some of its financial commitments.

R: An insurer so rated has experienced Regulatory action regarding solvency. The rating does not apply to insurers subject only to to non-financial actions such as market conduct violations.

NR: An insurer with this designation is Not Rated, which implies no opinion about its financial security.

Plus (+) or minus (-) signs following the ratings from AA to CCC show the company's relative standing within the major rating categories. Fennell Betson"

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