Fitch Ratings this week warned that users of insurance ratings from four large credit rating agencies (CRAs) fail to understand differences in the rating scales – differences that separate A.M. Best from the rest of that pack.
Specifically, Fitch said that an “A-” insurer financial strength rating by A.M. Best is roughly equivalent to a “BBB” rating from Fitch, Standard & Poor’s or Moody’s.
“This is consistent with how capital markets view debt ratings, where debt ratings in the ‘BBB’ category (and above) are considered investment grade,” Fitch said in a statement announcing the availability of a new white paper comparing the rating scales.
The white paper is titled “Not All Insurer Financial Strength Ratings Are Created Equal: A Look at the Lack of Comparability of A.M. Best’s ‘A-‘ IFS Ratings to Those of Fitch.”
The Fitch white paper is available via Fitch’s website.
“Fitch does not suggest that A.M. Best’s approach is wrong. Rather, Fitch suggests that A.M. Best’s approach is different, and that this difference, in turn, makes A.M. Best’s ratings less comparable with those provided by Fitch and the other CRAs,” said the announcement.
Fitch attributed the lack of comparability between A.M. Best and the others to criteria differences and to Best’s use of a 13-category scale (versus around 19 rating categories for Fitch and others).
Fitch also highlighted four specific types of insurers for which differences show up most prominently: newly formed re/insurers, insurance companies with high country risks (i.e., low sovereign ratings), captives and smaller-sized insurance companies.
“Under A.M. Best’s criteria, re/insurance companies in these categories are often rated ‘A-‘ or higher, whereas Fitch’s criteria would typically limit ratings to the ‘BBB’ IFS ratings category,” the statement said.
Consequences of the lack of comparability for insurance brokers and regulators that use the insurer financial strength ratings include the potential for less-informed decisions related to insurance and reinsurance selection and higher exposure to insolvencies and unpaid claims, Fitch said.
In fact, Fitch said that an analysis of historical statistical ratings performance – a comparison of default and impairment rates by rating category of the various CRAs – indicates that the “historical impairment rate for A.M. Best’s ‘A-‘ IFS rating is significantly higher than the estimated historic default rate for Fitch’s ‘A-‘ ratings and falls between Fitch’s default rates at ‘BBB’ and ‘BBB-‘” levels.
Over roughly 30 years, the impairment rate of A.M. Best’s “A-” is 7 percent, while the default rate for Fitch’s “A-” is 2 percent, Fitch continued.
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