• Using Unrated Insurers

    07/12/2018

    Insurance is a necessary requirement for any organisation. Insurance provides protection when insurable costly incident occurs. As a business owner or manager, it is hard to know if the best available cover for your particular risk exposure has been procured. To reduce this uncertainty use a specialist broker who has built an extensive knowledge about your industry. A specialist broker will understand the insurers who offers the most comprehensive cover for the best price.
    Not all insurers are created equal some are rated, while others are unrated. There may be potential benefits to choosing an unrated insurer, however the disadvantages are significantly more numerous. Complete Response LLP will only work with reputable, rated insurers.

    What is an unrated insurer?
    An unrated insurer does not qualify for an insurer financial strength rating given by international rating agencies. Examples of ratings agencies are Standard & Poor’s 500 index (S&P), Moody’s, Fitch Ratings and A.M. Best. Fitch’s definition for an insurer financial strength rating is ‘it provides an assessment of the financial strength of an insurance organisation’ and its subsequent ability to pay valid claims to its policyholders.
    Each agency has its own financial rating method, but ratings are usually arranged on a scale based on letter grades to indicate the degree of credit risk. For example, an ‘A’ rating means that the insurers have an excellent ability to pay valid claims, while a ‘C’ rating means that the insurer has a poor ability to pay valid claims.
    There is no legal requirement for an insurer to be rated, and brokers are not obligated to solely conduct business with rated insurers. The use of a rated insurer is a preferred option and an unrated insurer should not be considered first. Both rated and unrated insurers are capable of going bust, however unrated insurers have a higher propensity for failure.

    Why do companies use an unrated insurer?
    An unrated insurers may be appropriate in a limited number of circumstances. For example :
    1. They may offer a very competitive and attractive premium.
    2. Sometimes brokers have no other options other than place business with an unrated insurers if there are no alternative quotations.
    3. Some unrated insurers have been trading in the United Kingdom for several years, and are not deemed risky.
    4. Their reputation may be supported by the Prudential Regulatory Authority and the Financial Conduct Authority, which are the same authorities that endorse A-rated insurers.
    5. The Financial Services Compensation Scheme (FSCS) may pay some claims the failed unrated insurer cannot meet, but will not offer 100 per cent compensation in every case. The FSCS does not cover the following:
    a. Non-UK risks
    b. Ship (including yacht) policies
    c. Larger businesses, except in the case of compulsory insurance, such as employers’ liability
    d. Small businesses who purchase credit or goods in transit insurance
    e. Reinsurance

    What are the drawbacks of using an unrated insurer?
    Even A-rated insurers carry the risk of failure. They are considered to be more stable companies the potential benefits of choosing Using an unrated insurer may appear to be worth the risk, BUT the possible detriments can end up being far more expensive.
    The main drawbacks are :
    1. The insurers are higher risk.
    2. The insurer lacks the appropriate financial stability.
    3. Many unrated insurers, typically based in continental Europe, are not subject to the same solvency test and regulations as UK-based insurers.
    4. The unrated insurer may be difficult to contact when an issue or concern about a policy occurs.
    5. Claims payments are may be delayed.

    Recent developments concerning unrated insurers
    The risk of using an unrated insurer is not just hypothetical. On 17th November 2016, Gable, an unrated Liechtenstein insurance company, went into liquidation with an automatic cancellation date for all their policies of 16th December 2016. This left policyholders just one month to secure alternate cover. A similar high-profile insurer default occurred with Enterprise Insurance in October 2016.
    The use of an unrated insurer appears to have become an accepted option rather than a passing trend. , The British Insurance Brokers’ Association (BIBA) has developed a new, free tool that will make choosing an unrated insurer safer.
    The Litmus Test Report is accessible to all BIBA members and is intended to provide information about several key indicators to determine the financial strength of an unrated insurer.
    The tool cannot provide European-based unrated insurers with the robust legislative support that UK-based insurers have, This tool does not provide a robust financial assessment of an unrated insurer however it will offer business owners a comparable rating to make the choice between unrated and rated insurers a little easier.

    Choose the insurer which can provide peace of mind
    First Insurance Solutions, strive to direct clients towards both reputable and UK registered insurers. Your policy is in safe, capable hands. For more information on meeting your insurance needs, contact First Insurance Solutions today – 01634 868444/info@firstins.co.uk

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