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'Drop mandatory insurer strength ratings'

Requiring insurers to have financial strength ratings adds cost to the industry but does little to help consumers, industry commentators say.

Monday, June 18th 2018, 6:00AM 12 Comments

by Susan Edmunds

The law requires licensed insurers to have a current rating from an independent ratings agency.

It can cost about $100,000 to get a rating.

But insurance law specialist Crossley Gates said that was of little use to the companies' customers. He said the issue had been highlighted again by the failure of CBL.

"If insurer failure is the problem we are trying to avoid I don't think the ratings thing is working at all. It's just a hugely expensive exercise."

He said the Insurance Prudential Supervision Act should be enough to deal with issues of insurer solvency. The Reserve Bank should be given more resources to monitor the sector, if necessary.

"If prudential regulation is not enough, maybe that needs to be bolstered up there. I would have thought [ratings] are redundant and should be dropped."

David Whyte, former managing director of AIG Life in Australia and general manager of AIA in New Zealand, agreed the ratings were a waste of money.

AIG nearly folded in the global financial crisis, despite having an AA+ rating.

He said some in the industry thought their obligations under IPSA were more stringent than the tests for financial ratings agency research.

"This surely raises the question why there is additional expense incurred in creating a report that adds nothing to the comfort provided by the IPSA legislation."

Consumers did not understand what ratings meant, anyway, he said.

"I know the Reserve Bank made the claim they were useful for information for its purposes but they can pay the fees in that case, it's a significant expense."

He said when AIA was downgraded from AAA to AA+ it made no difference at all to its operation.

The difference in funding costs as a result of the downgrade was in points of a percentage, he said.

"The blanket demand on all insurance licensees [for a rating] is not appropriate."

Tags: AIA David Whyte insurance law

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Comments from our readers

On 18 June 2018 at 8:30 am Tash said:
What is worse is that some try to sell the better rating as a reason to recommend their inferior policies. I don't fall for that nonsense, and it is nonsense.
On 18 June 2018 at 7:24 pm RiskAdviser said:
Agree with the points raised in the story and by Tash.

Financial Strength Ratings as a measure of an insurance company by a client taking a policy is farcical at best and misleading at its worst.

I’ve commented at length on this, if you’re an investor, yes I get it, as a client and consumer of their products it gives no comfort on any level.

The FMA and Reserve bank require all insurers to operate in a prudent way with sufficient capital and their financial strength rating has no bearing on them issuing a license, outside of what would align naturally with both.

As to the quality of their products, the ability to and attitude to pay claims, not even close.

If you really stop and think about it, an insurer with crappy products, great selling points, stable premiums and a crap attitude to paying claims will potentially look good under financial strength ratings. Especially the bit about risk exposure and the relative cost of claims.

How long they last with that approach is possibly not long, but they could rate well.

On 19 June 2018 at 10:59 am w k said:
question: with the rating of companies, do consumers really understand that low risk does not mean no risks?
On 19 June 2018 at 1:34 pm Do what is right said:
Risk Adviser has said that they understand the need for rating in investment. Same must apply to insurers as well because if an insurance company cannot pay a claim or try to avoid due to financial pressures, the result is exactly the same. Money is lost due to the unstable financial position of the company.
On 19 June 2018 at 2:26 pm dcwhyte said:
To "Do what is right" - I believe the point of the article is to suggest that if RBNZ oversight and scrutiny of licensees does not pick up "financial pressures"then the process to do so need to be more robust. The argument also goes that S&P and AM Best have been pretty average at issuing warnings about unstable financial positions.
On 20 June 2018 at 9:54 pm davo_b said:
The suggestion is rubbish. The CBL example shows that both financial strength ratings and RBNZ capital requirements weren’t enough, so are you going to suggest RBNZ gets sacked too because it costs a whole bunch to comply? Our clients need something to measure strength and no system is bullet proof / crystal ball gazing, so good luck to those who think they can come up with an alternative...
On 21 June 2018 at 1:52 pm dcwhyte said:
To davo_b - I would have thought the CBL example is the very reason why the usefulness of the ratings is being questioned! How effective was AM Best in warning about the pending action? At the beginning of February 2018, CBL had a B++ (Good) financial strength rating - three weeks later CBL is in liquidation. No way RBNZ is removed, but a suggestion that their processes be made more robust and effective would assist greatly.
On 21 June 2018 at 2:27 pm Ron Flood said:
David, should we therefore be worried about a local medical insurer with a B+ rating, and a local life insurer with a B++ rating, both of which have been issued by AM Best?
On 21 June 2018 at 9:54 pm dcwhyte said:
Presumably not Ron - at least not according to the rating That's the point - how can you tell?
On 22 June 2018 at 9:15 am Tash said:
to 'Do what is right' - it helps to remember that insurance companies to policy holders are not the same as banks or other institutions that promise to repay all the investors money (as adjusted for returns)often on demand. Insurance companies promise to pay back nothing unless you qualify for a claim and most do not. This is how insurance works,non-claimers subsidise claimers.
As an adviser I am in no position to determine the real strength of an insurer, no adviser is, we don't have access to the information even if we were skilled enough to make sense of it. I believe that if the government appointed regulator is happy with their solvency and capacity then that is good enough for me. (Correct me if I am wrong but the law requires the insurance company directors to blow the whistle on the company if the solvency margins are likley to be breached in the following three years.)
However it is my job as an adviser to recommend the policy with the best wording and most generous benefits to allow maximum payment of benefits when the client needs it.
A strong AA rating is small comfort to the client whose claim is declined because there is no benefit in the policy, when another policy might pay substantial amounts!
On 25 June 2018 at 9:18 am Chatterbox said:
Any insurer impliedly using a rating to sell a product to provide confidence to potential or existing policyholders is breaching the internal rules for use of the rating obtained. To obtain a rating the insurer must declare it will not use it to promote sales/products because the rating terms, in undisclosed small disclaimer print, states the rating has no application to claims, policy terms, value or product quality. Furthermore, if you think about it, the rating focuses on reserves and the capital adequacy to meet claims in a financial sense. So if capital reserves are stable and claims denied or policy terms altered to reduce claims, then the rating improves. Ratings have no relevance to brokers/advisers/agents, policyholder and insureds. There are many insurers in breach and its yet another dirty little secret in the sector as advisers use it to help sell the product to secure a commission. The insurer's propensity to seek a rating while altering policy wordings with different versions after issuance is all part of a major industry fraud on the market and it just gets worse from there.
On 27 June 2018 at 9:28 am LNF said:
reference to CBL. The best example is AMI. A very substantial insurer, maybe the largest domestic lines insurer. Liabilities taken over by the taxpayer to save it from collapse

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