Following the collapse of Alpha Insurance and notable others, the debate around using un-rated Insurers continues. But what does un-rated really mean and are brokers performing enough due diligence on their markets?
Market security assessment is ultimately an activity to protect policyholders. The recent Insurer collapses have sent shockwaves through the UK insurance industry, especially where compulsory classes of insurance (such as motor) are involved. As brokers strive to meet their regulatory obligations of market due diligence, all too often an ‘Insurer rating’ is the first, and often the only, piece of information that is considered.
What’s in a rating anyway?
Generally speaking, an ‘Insurer rating’ refers to an assessment by independent rating agencies, such as AM Best, Standard & Poor’s and Moody’s, who provide useful information and opinions. They are not however infallible.
Alpha’s failing was the result of a knock-on effect of a rated reinsurer’s collapse, as it had relied on CBL as a reinsurer, whilst not being independently rated itself.
In reality, no Insurer throughout Europe is unrated as they are governed by their local financial regulator who assesses that Insurer’s risk management policies and capital adequacy against their Solvency II requirements. In the UK this job is conducted by the Prudential Regulation Authority (PRA).
If an Insurer has been declared solvent by its relevant financial regulator and fit to trade in a relevant area, it is meeting the legal requirements of complying with the rules of Solvency II. Furthermore, there is an array of further diligence assessments that can be carried out.
So why then are independent ratings held with such esteem, or more importantly, why is it that we effectively seem to prefer those ratings to the judgement of our regulators?
The correct way to assess the strength of an Insurer should be to assess their Solvency ratio. This ratio effectively measures an Insurer’s ability to meet its debts and obligations, and to meet its short and long term liabilities. The lower the ratio, the greater the chance that company will default in future on its liabilities.
Under Solvency II, the minimum Solvency ratio allowed for an Insurer is 100%. It is now common practice for many Insurers to strive to hold Solvency ratios of around 130%, in other word, to include a ‘buffer’.
So, the best way to assess the financial strength of an Insurer is to read that Insurer’s company accounts and Solvency II report. Further due diligence should be carried out to assess Regulatory Licencing and Permissions, Passporting Rights and checks for Sanctions.
How RegTech solutions can help
It is also important to remember that Insurers are not legally required to gain an independent rating, and firms acting as markets but not carrying risk (such as MGAs and Wholesale Brokers) cannot get an independent rating anyway.
But Brokers arranging policies have a duty of care to perform appropriate due diligence on ALL counterparties used to arrange policies, risk carrying or otherwise. REG has over 3,000 members, all UK based insurance intermediaries, and it’s interesting to see that more than half of all placing arrangements they have are via intermediary markets (such as MGAs and Wholesalers).
The rise of Regulatory Technology (RegTech) has enabled the collation, cleansing and monitoring of wide-ranging diligence data to be on demand and cost effective. Solutions such as REG’s Market Monitor aggregate information on ANY firm used as a market to cover:
- Regulatory Permissions (FCA and PRA) including passporting rights
- Credit Data with Summaries with detailed report requests
- Sanctions Checks on both Firms and Approved Persons
- Companies House Key Filings, Solvency II reports (where appropriate) and Company Accounts
- Data Protection Registrations
It then performs daily checks on the data, reporting on changes that would prompt users to undertake further diligence, or change how they are reporting marketing choices and options to their customers.
The insurance supply chain is complex and continues to evolve. In recent years the growth of MGAs has seen even greater placing options for Brokers. Additionally, many firms have opened new entities in the Eurozone as a result of Brexit and Wholesale Brokers continue to seek out new and emerging routes to market on behalf of their sub-brokers.
So, independent Insurer ratings have their place, but they must be taken in the context of a variety of other factors and cannot be relied upon in isolation to demonstrate due care and attention when arranging policy placements especially where MGAs and Wholesale arrangements are used.
Supply chains must be assessed and continually monitored, including intermediary markets that operate within them, and diligence must flex as routes to market change and ultimate insurers update their Solvency II reports.
With RegTech solutions now readily and affordably available, is it enough to only talk about Insurer ratings when assessing your supply chain and market arrangements?