As a business owner, not much seems worse than facing a claim against your business. Having a financially sound and respected insurance carrier, however, can make all the difference during such a stressful time. Knowing that insurance professionals are managing the defense of the claim and that your carrier will be there to fund any settlement or judgment against you is essential for your peace of mind. Make certain that you can count on your carrier when you need to do so. Here are some considerations for your review:
First, the financial strength rating of the insurance carrier is very important. One rating to examine, considered by some to be the “gold standard”, is a carrier’s A.M. Best Company rating. A.M. Best Company is a global credit rating agency serving the insurance industry. It is a source for an independent opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations. Moody’s and Standard & Poor’s are also rating agencies equally respected in the market, although they issue ratings for a broader range of industries and do not focus solely on the insurance industry.
Second, the financial size of the carrier can be found by examining a purely objective rating that reports on the size of the policyholder surplus. For example, using the A.M. Best Company website, the financial size of the carrier can be found by clicking the “AMB#” to the left of the carrier’s financial rating. The categories start from less than one million, and can range to over $2 billion. Obviously, less surplus money indicates less money to pay claims when needed.
Every renewal notice should serve as a reminder to conduct a yearly investigation into trending topics and recent developments. If a carrier is in the news for failing to pay claims or for poor claims service, or if there has been a change in its financial size or a downgrade in rating, it may not be wise to bind coverage with that carrier. Your insurance agent should also be aware of any changes in the rating of a carrier and should be able to supply you with further information about its status.
Insurance Agent Policy Exclusion
It is important to understand that insurance agents also carry errors and omissions policies, thought these policies often contain exclusions. Consequently, even if a claim is made against an insurance agent for placing coverage with an unstable carrier, the agent may not have any coverage for that claim. Here are some examples of two policy exclusions in the market which may serve to further highlight the importance of an insurance carrier’s financial strength and size rating:
- No coverage for an insolvency loss if an agent placed business when the carrier was rated B or lower by A.M. Best. (While maintaining the insolvency exclusion, the Westport Insurance Corporation policy provides an exception to the exclusion if at the time the agent placed coverage, the carrier was rated by A.M. Best as B+ or higher.)
- No coverage for an insolvency loss if an agent placed business with a carrier who becomes rated B or lower.
- No coverage for an insolvency loss if an agent placed business when the carrier was rated B+ or lower and the financial size category of the insurance company is below VI ($25M).
How long the carrier has been in business and, specifically, how long it has been insuring business owners in your industry, is an important consideration. Knowing the carrier is in the business for the long run is very important to ensure coverage for all reported claims. Cheaper rates may indicate that the carrier has a short-term focus. Overly competitive rates may actually indicate that a carrier is not pricing adequately for a variety of reasons. Under these circumstances, a carrier may be unable to keep those low rates without either aggressively decreasing surplus, raising rates or sliding into insolvency.
What if a carrier goes into receivership after a claim is made? While guaranty funds may be available to provide some protection, not all companies have this protection. Risk Retention Groups, for example, are generally not part of such a Guaranty Fund. Moreover, even if the Guaranty Fund is available, the maximum benefits are limited. If a carrier’s rating is declining and a carrier is not subject to the Guaranty Fund, it may be time to reevaluate that insurance carrier.
If you require excess insurance, know that many carriers have underwriting standards that preclude them from providing excess insurance over a carrier that is rated B+ or lower. Moreover, underwriters consider only ratings by certain established rating agencies as reliable and relevant. Since turn-around times for placing excess coverage is usually short, placing primary insurance with a B+ or lower carrier can result in a situation where you are past your policy’s expiration date with no excess coverage. Moreover, the financial size of the carrier in terms of available surplus is also important to excess carriers. Low surplus levels may concern excess carriers who worry about funding claims when surplus is inadequate.
Lockton Affinity’s Insurance Carriers
At Lockton Affinity, we have built an excessive network of reliable, financially stable carrier partners. In fact, we require our partners to have higher ratings.
In the end, it is important to monitor the strength and size ratings and activities of your insurance carrier. If you discover that your carrier’s financial rating has dropped to an unacceptable level, it is imperative that you understand and evaluate the risk.
Copyright Swiss Re Corporate Solutions 2018. This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice.