14 Mar It’s That Time of Year
Each year, around this time, the various financial rating agencies are especially active in announcing the ratings of the carriers they handle. Based on the type of business they handle and their geographic footprint, 2022 may have been a good year. Or possibly not. It is important to be alert to changes for the carriers your agency handles (both P&C and L&H) as this may prompt your agency to take further action.
Every year with few exceptions, there are some carriers whose rating drops. However, the downgrade may often be minimal (A++ to A+ or something comparable). But if a carrier had a rough year, their rating may drop significantly, such as from one letter grade to another. The key is not to assume that the rating of your carriers will stay the same, and don’t count on the carrier field rep/underwriter notifying you, especially if the rating has dropped.
Most, if not all, of the E&O Plus agencies have a solid process to get the rating updates as they are announced. Typically, some level of technology is used to monitor this important issue. One platform used by a number of E&O Plus agencies is ALIRT. They analyze insurance companies’ relative financial performance trends across three industry sectors: Life/Annuity, Property & Casualty, and Health/Employee Benefits. There are certainly other firms that perform this level of analysis. ALIRT happens to be one that I have seen some of their reports, and they are well done.
Agencies should have a minimum financial rating for those carriers they do business with (either directly or through a wholesaler). That minimum rating is often A-, the bottom of the range of carriers labeled “Excellent.” One of the trickier issues you may face deals with carriers with an NR rating or carriers that are not even rated by some of the various rating agencies (AM Best, Demotech, S&P, Moody’s, etc.). For example, an AM Best rating of NR-3 essentially means “Rating Procedure Not Applicable.” This rating could result from the type of business the carrier writes or the limited number of states in which the carrier does business. An NR rating is not an automatic “red flag,” although reviewing the carrier in more depth is probably a good idea. Since these carriers are not assigned a letter rating, it will be difficult to know if their financial position is deteriorating.
One of my all-time favorite expressions, from my days at corporate America, was to “know the trend the minute it happens.” The key is to be proactive when it comes to carrier financials. This is an advantage regarding those rating platforms that provide quarterly updates.
Suppose the rating drops below a pre-determined level (for example, from A to B). In that case, the agency should look to identify the accounts with the specific carrier via its agency system. Based on the level of the rating drop, serious consideration should be given to notifying these accounts and advising them that your agency can remarket the account to a carrier with a higher financial rating. This notification (there is a sample in Passport) should be in the form of a letter, and the client should be provided options for them 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 the client should be required to advise your agency in writing of their desired direction. This documentation will be very important if the carrier is ultimately placed in receivership or declared insolvent.