The importance of Ratings for Insurers and the Implications of Poor Ratings

Like many industries, the insurance sector is rated to give brokers and consumers better knowledge of the competency, standard and performance of a company, so they can make a more informed decision over whether to choose a specific company as their insurer.

Financial Strength Ratings

Such ratings relate to the financial strength of the company and its proficiency at meeting ongoing policy and contract obligations. Financial Strength Ratings in the insurance sector are provided by companies such as Standard & Poor’s (S&P), AM Best & Fitch.  For example S&P ratings range from a ‘AAA’ to a ‘D’. AAA is the highest possible rating and means the insurance company maintains credible financial performance and can repay all debts.  The lowest ranking is D, which shows an insurer has defaulted on its financial commitments.

Unrated insurers

It is important to note that not all insurers are rated. Unrated insurers do not carry a ‘financial strength rating’. Unrated insurers pose a greater risk, as they have not been rated on their financial strength and, in the case of some foreign insurers, are not subject to EU or UK insurance regulations.

The implications of an unrated insurer

Whilst “A rated” insurers are not immune to the risk of failure, using an unrated insurer comes with greater risks for customers.

Some of the most common risks of using an unrated insurer include:

  • The financial stability of the insurer is not verified.
  • Insurers located outside of Continental Europe are not held to the same regulations, legislation and testing as those based within the EU or UK.
  • Such insurers may be difficult to contact should an issue arise.

Poor ratings and being without ratings can be a leading factor in the collapse of insurance companies.

For example, in 2016 the Gibraltar-based insurer Enterprise collapsed when Gibraltar’s Financial Services Commission (FSC) ordered the company to stop writing new insurance contracts after Enterprise informed it had become insolvent and was unable to secure additional funding.

The FSC said it had been closely supervising Enterprise because of concerns over its financial position and that it had been seeking assurances from the company about its financial position, assurance that would have been clarified if the company had secured a high Financial Strength Rating.

Another example is when the unrated Liechtenstein insurance company, Gable, went into liquidation in 2016. All its policies were automatically cancelled a month after the insurer went into liquidation, leaving policyholders with just weeks to find new cover.

Naturally, the collapse of any insurer creates chaos, leaving people without vital cover and creating stress, worry and confusion for customers.

However, Nelson Policies at Lloyd’s is backed by the Lloyd’s market, which is rated as A+ by S&P, giving brokers peace of mind that their insurance solutions are in financially capable and credible hands.

For more information about our S&P rated A+ insurance solutions, including for non-standard residential property, get in touch with Nelson Policies at Lloyd’s friendly team of residential property experts.

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