Unrated Insurers – Defending the seemingly indefensible
Rating is a stick that representatives of larger insurers like to use to beat smaller rivals that challenge their dominance. The critique is often partisan and presented in a superficial manner without full consideration. “Unrated” is also a good sound bite to help the press whip up excitement in an often otherwise staid industry.
Sadly these days, click-bait and sensational journalism can lead to misinformation, which can turn into smear campaigns and witch hunts when really, exposing the public to all the facts would enable them to gain a better understanding of a situation and to make their own, informed decisions.
Clearly in the case of Alpha Insurance there were severe failings, ones that have had awful consequences for hard working people. My company did not deal with Alpha and I’m not seeking to defend them. However, we do work with other unrated insurers and I feel that the case for dealing with these reputable firms needs to be made.
A David v Goliath Situation
What is often forgotten in the debate about unrated insurers is that Insurance remains a relationship-based business, between that of the insurer to broker, and broker to client. If a broker is able to build a good rapport with an underwriter, one that facilitates the exchange of information and enables them to negotiate openly on behalf of their clients, this can only ever be a good thing. The broker can agree bespoke offerings and deal with flexibility. Often, with large corporations, there simply isn’t this degree of entrepreneurialism or flexibility. And if there is, the delivery times can often be unworkable. Whereas unrated insurers have shorter chains of command and things get done without prohibitive bureaucracy.
Unrated insurers are often smaller with lean operational overheads in comparison to their more renowned rivals. For that reason, their cost bases are likely to be lower and as a result they can regularly offer highly competitive premiums. In price sensitive markets with largely commoditised products, this may prove to be the key deciding factor in winning business.
A-rated companies can fail, too
Another important point is that since the collapse of Lehman Brothers near the beginning of the economic crash, the value to be placed in rating agencies’ opinions is questionable. The award winning film “The Big Short” illustrated the fallibility of being overly dependent and reliant on external rating houses who have a vested interest in providing a positive outcome for those their they accredit. Moody's put Lehman Brothers' investment-grade A2 rating "on review" just five days before the company was declared bankrupt. Standard & Poor's provided American International Group (NYSE: AIG) an investment-grade A rating under a week before the insurer became nationalised. In the case of Alpha, as recently as February multiple agencies were giving their reinsurer's CBL Corporation Limited, whose collapse ultimately lead to this crisis, a rating of A-.
Also, in terms of disruption, it could easily be argued that A rated insurers often enter niche markets suddenly and exit just as abruptly. This may be due to a change in strategy or a company restructure that is determined from on high, as is often the case at large organisations. They may also enter new markets without the requisite specialist knowledge. In these circumstances, due to insufficiently informed underwriting, they are likely to suffer large losses in a short space of time and be forced to exit entirely. This leads to severe disruption for policy holders and brokers alike, with unsustainable premiums having to be hiked much to the dismay of the brokers’ client base. The broker then suffers the loss of an entire book or the challenge of rebroking each case. The impact is not on the scale and severity of this week’s pandemonium but it is still highly frustrating nonetheless.
Ratings vs sustainable business practices and longevity
The bottom line is that there must be trust in any professional trading relationship. Obtaining a rating is a short cut method to obtaining that trust, albeit an expensive one with merits that are more debatable than some would have you think. A number of unrated insurers have been trading for long periods. Their longevity is based on sustainable business practices, yet their small scale cannot justify the expense of paying a rating house to accredit them. Clearly, any broker wishing to build long term relationships with their clients should investigate the liquidity and solvency of an unrated insurer before placing business with them. Otherwise, it is not just their client’s insurance premiums that they are risking but their own reputations and with it the long term future of their businesses.
Unrated insurers will not be suitable for every client. There are also clearly some unrated insurers operating very close to the wind in a disreputable fashion. However, to tar all unrated insurers with the same brush and to dismiss their worth entirely is to ignore the value they bring to the market place. There is a place in the market for well run, unrated insurers.