05 Dec Did You Know?
Typically, mid-year is when it seems that affirmations or changes in carrier ratings are released. The changes may be minor or, as we have seen recently, they can be more significant. In two months, one carrier went from AM Best’s rating of A- to C++. I would consider that drastic.
For various reasons (the marketplace is certainly one), the news on this recent downgrade is predicted by many not to be the last, with some stating, “It is going to get uglier before it gets better.” When the overall balance sheet deteriorates to certain levels due to issues such as various metrics and adverse loss development, all rating services will act, and the actions can be swift and drastic.
If you are thinking that this was probably a Florida or California carrier where the marketplace is especially challenging, I understand your thinking, but this was not the case. The carrier referenced above was in the middle part of this great country and had achieved a solid history of profitability for years.
Could one of your carriers (or an E&S carrier you see from your wholesalers) see its rating drop tomorrow or over the next few months? If so, how and when will you know? The key is to find out as quickly as possible, and for this reason, agencies should have a process to ascertain this information. Since it is common to note the carrier rating on the agency proposal, I have seen some agencies use the approach of pulling up the carrier rating at that time. There is a tremendous danger/downside to this approach.
Let’s use the above carrier scenario to point out the issue. You do the proposal in June; at that time, the carrier is A- so all is good. The client secures the coverage. By September 1, the carrier is now rated C++. This is NOT good! What if you didn’t know of the downgrade (don’t expect the marketing rep to tell you!)? If you didn’t have the means to get the latest updates, it could be some time before you find out, and based on the carrier, could another downgrade be possible? In my 49 years in the business, I have seen several carriers go from A to Insolvent/ Receivership in less than a year. It does happen!
Since identifying the rating of your carriers on an ongoing basis can be time-consuming, especially if the agency represents 50+ carriers, consider using technology to monitor this critical issue. Several E&O Plus agencies use one platform I have heard of called ALIRT (this is the platform that identified the carrier reference above). Based on their website, “ALIRT Research models and analyzes insurance companies’ relative financial performance trends across three industry sectors: Life/Annuity, Property & Casualty, and Health/Employee Benefits.” If you don’t have a technology platform currently to do this analysis, you may want to check ALIRT to see if it is a good fit.
When the rating changes below a pre-determined level (for example, dropping from A to B), the agency should, with a sense of urgency, look to identify, via their agency system, the accounts with the specific carrier. Based on the level of the rating drop, serious consideration should be given to notifying these accounts of the rating drop and advising them that your agency can look to remarket the account to a carrier with a higher financial rating. This notification should be a letter, and the client should be provided with options to consider. They may wish to stay with the same carrier because the premium is lower, or they may want your agency to provide quotes from other carriers. The bottom line is that the client should be required to advise your agency in writing their desired direction. This documentation will be very important if the carrier rating drops to a level where they are placed in receivership or declared insolvent.
The bottom line is that it is imperative that agencies take a proactive approach to quickly know the latest information on your carriers, as this will hopefully minimize the impact if one of your carriers is going in the wrong direction. Many E&O Plus agencies have also established a “Security Committee” to handle this responsibility, another initiative worth considering.