'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."
| « Asteron appoints Frecklington replacement | FSCL warns: Roboadvice creates non-disclosure risk » |
Special Offers
Comments from our readers
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.
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!
Sign In to add your comment
|
|
Printable version |
|
Email to a friend |
