Take ratings with grain of salt: Neilson
Advisers and policy holders are being warned to look at more than just the letters behind a company’s name as life insurers are compelled to reveal their financial strength ratings from this month.
Friday, October 19th 2012, 11:04AM 
4 Comments
The Insurance Prudential Supervision Act requires the companies to have and display a rating from an approved ratings firm such as Standard and Poors or AM Best.
Previously, insurers would often only have been given a rating when they wanted to raise capital or were publicly listed.
Financial Services Council chief executive Peter Neilson said New Zealand life insurance firms tended to be quite conservative by nature. He said life insurance had a long gestation period so it was only serious errors in calculation that could land a company in major problems.
He said the ratings requirement was unlikely to have a big impact on companies, although it could create pressure on businesses that went through an unprofitable period. Now, they may need to raise capital to maintain their rankings. Previously that would have been unnecessary.
He said a credit rating was more of a concern for large investors, the capital owners in the company, than the life insurance customers themselves. “Losing money as an investor is not the same thing for policy holders.”
Neilson said what was more important was the rating of a reinsurer, because risk was shared between the insurance firm that sold the policy and the reinsurer. In some cases, the reinsurer might have a much higher rating. “You need to look at both if you want to assess your exposure as a policy holder.”
Adviser Matt Phillips, of Top Half Financial Services, said Fidelity Life was a good example of that. “They might only have a A- but they have a high level of reinsurance so would not be so effect by a big event like the Christchurch earthquakes.”
Neilson says ratings should be taken with a grain of salt. “Many that went under in the global financial crisis had good credit right up until the last minute. It’s not a guarantee.”
Professional Advisers Association president Peter Leitch agrees. “AIA used to be the only AAA rated insurer in the country until they were bailed out by the Government.”
He said insurers’ retention levels were also important when considering their ability to pay claims.
Phillips said his firm took into account financial strength of insurance providers and their reinsurance treaties when deciding on preferred providers. “Advisers should clearly display the financial rating of any company in their recommendations and take it into account. But it is not the entire picture.”
Leitch said he doubted ratings would change advisers’ behaviour unless any rating was a significant surprise. “Most New Zealand insurers will have a strong rating, anyway.”
The RBNZ points out that despite being periodically reviewed, ratings do not respond to specific events or market volatility.
Pinnacle Life has one of the lowest ratings. In awarding it a B, AM Best said: “Direct distribution expenses, such as advertising, have been considerable. Pinnacle's expense ratio exceeded 100% over the past five years. Management is aware of the need to control expenses."
It said a lot of its expenses were advertising and would be reduced.
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pinnacle doing well! no commission less costs! yer right!
Companies have only a certain amount of money with which to pay claims and debts. A claims paying rating only looks at a company’s ability to pay claims, but a stable company must have adequate funds to cover all its operating needs, including claims and debts.
An example of this “competition” for money would likely occur with a run on claims . Their rating for claims paid was affirmed that day because as of that day, they had $XYZ million more with which to pay claims. That same day though, their debt rating was downgraded because $XYZ million more debt reduces a company’s financial flexibility, the probability of repaying its loans, and possibly its ability to invest in growth (depending on what the debt is used for).
Now most of the established players in the market I suspect would self-insure (in that they do not use reinsurance), and therefore if there is a run on claims, such as a pandemic suggested by Sovereigns CEO, then what comfort does one get from a rating ability.
Research on Equitable Life reveals that they had allowed large unhedged liabilities to accumulate in respect of guaranteed fixed returns to investors without making provision for adverse market changes. One could argue that life companies that do not operate investment product are at less risk than those that do.
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When everything has just turned to crap, the worst has happened in my life, I will turn to my insurance. So will our clients. I know which I would rather have as my backup plan.
One that can afford to pay.
Leitch is wrong, or at least I wish he was. I wish consumers and advisers gave more importance to the ratings.