Insurer Insolvency: Will Agents Be Held Responsible’

Those of us who have been in the insurance business for fifteen years or so can remember when there was a limited number of rating agencies assigning ratings to insurance companies.

Today, there are more opinions on insurer solvency than ever before. Yet, despite this proliferation of rating opinions, insolvencies continue to disrupt the marketplace, while placing insurance agents and producers in a precarious situation. Insolvencies call into question the legal and business standards related to an appropriate level of responsibility for the financial due diligence of insurance companies.

What are you as a professional independent agent to do to protect yourself from the time, effort, expense and legal implications related to the insolvency of one of your markets? You’d better sit down before you read the next paragraph.

Well-rated insurance companies will fail. Yes, you read it correctly. Agents think they are protected from insurer insolvencies, or at least the litigation associated with insurer insolvencies, when they place business with markets that are rated at the “A” level or higher. Unfortunately, plaintiffs and their attorneys may attempt to hold agents responsible for their damages from the insolvency of well-rated insurers.

If regulators at the various departments of insurance and rating agencies with all their analysts cannot assess the financial data prepared by insurers and reach a consensus as to insurer solvency, how can an independent agent or producer be expected to do so? Isn’t reliance on a third-party rating sufficient due diligence?

Maybe not.

Is the rating based on financial criteria?
Ratings can be qualitative or quantitative. That is, a rating can be based upon financial analysis of historical data or trends and subjected to numerical analysis, or the rating can be influenced by participative discussions that focus on management’s decision-making criteria, as well as operating and profitability assumptions that can be subjected to interpretation. When an insurer rating is based upon both quantitative and qualitative criteria, we respectfully suggest that the result should be considered qualitative.

In other words, even if a rating is interpreted to be a financial rating of the insurer, it is possible that non-financial considerations influenced the rating. Most of us will never know what transpired during the meetings held between the insurer and the rating agency. We will never know how the meetings influenced the rating assigned to the insurer.

Are you entitled to rely upon the rating?
Rating agencies that issue ratings generally prepare lengthy definitions and descriptions of their rating process. Often these important explanations, including any disclaimers, are presented at the beginning of the agency’s publication and perhaps on its website.

After reading the introductory pages of a rating agency’s publication, why would anyone believe that they were entitled to rely on the rating as a financial rating? What if no level of reliance on the rating was intended? What if the issuer of the rating specifically told you not to rely on the rating?

In effect, most rating agencies issue historical, not prospective opinions of financial strength.

You should acknowledge, and your clients should be advised, that ratings are not a warranty of the future financial condition of an insurer. You can advise those clients that the company is licensed in the state to write a particular line of insurance and that the company purports to be in good standing with the appropriate regulatory authorities, but that you are not the warrantor of its future financial condition.

Are all well-rated insurers equal?
It seems intuitive that “A” rated companies should be strong and should present negligible financial risk. However, it’s likely that some “A” rated insurers barely meet the criteria for receiving an “A” while other “A” rated insurers just missed a better rating. You have no way of knowing.

Further complicating your ability to interpret a rating is that rating agencies do not publish an exhaustive explanation of their rating criteria. When rating agencies have qualitative criteria as part of their evaluation process, they cannot possibly create a full and complete explanation of their criteria.

The point is that some “A” rated companies are more solid than others, and the various “A” rated carriers may have different areas in which their particular strengths lie.

While the overwhelming majority of well-rated insurers will survive, on a case-by-case basis, there will be individual company failures.

A lower probability of failure
Despite the failure of well-rated companies, the general rule is the higher the rating, the lower the probability of failure. This is what you need to tell your clients. Not that there is no probability of failure associated with a well-rated insurer, but that the probability is lower for well-rated insurers than for insurers that are not rated as well.

Appropriate and accurate disclosure is important for all parties involved in the issuance of insurance coverage to policyholders. This is every bit as important for agents as it is for rating agencies, regulators and insurers. Failure to provide such information can result in inaccurate expectations on the part of consumers (policyholders) and unforeseen liability for one or more of those parties.

On the issue of insurer solvency, you should make no assurances as to the solvency of the carrier. It’s the regulators and rating agencies that address that area, not you. You cannot be expected to be the guarantor of insurance company solvency unless you participate in the creation of that expectation.

Conversely, appropriate and accurate disclosure will usually lead to enhanced consumer understanding and satisfaction. For example, when your insured purchases an insurance policy, a deductible may be in place. You advise the insured of the deductible and he or she accepts the deductible as part of the transaction. In the event of a claim, the insured does not look to you to reimburse him or her for the amount of the deductible. The insured realizes that the insurer did not provide first-dollar coverage, and you did not agree to pay claims that the insurer would not. Your appropriate disclosure resulted in an accurate expectation by the insured.

Conclusion
Insurer solvency has been and will remain an issue that plagues consumers, producers, insurers and reinsurers as well as regulators and rating agencies. If producers utilize common sense in their communications on this issue, they may be able to direct responsibility to rating agencies and regulators, and thereby reduce their exposure to the time, effort and expense of legal action related to the insolvency of insurance companies.

Topics Carriers Agencies