Monitoring your carriers

Rough Notes, Feb 2003 by Hodges, Susan

There's more to tracking your carriers" financial health than watching the ratings

Martha Goodall* couldn't put her finger on it, but she knew something was wrong. The year was mid-2000, and Frontier Insurance Company wasn't returning her calls. And when Goodall finally reached the folks she usually dealt with, they seemed distracted and distant.

"I got this general feeling each time I called that their people were unhappy," says Goodall, vice president of a New York City-based independent agency that writes both property/casualty and life/health. The agency had done business with Frontier Insurance , a New York-based multiple-line carrier, for 10 years. So when the complexion of Frontier's interaction with the agency began to change, Goodall and her agency took quick action.

First, they scanned their list of carriers for those who also wrote malpractice insurance. They also signed contracts with additional carriers. Then they began placing all new malpractice business with these carriers. But Frontier moved even faster. "They pulled the rug out from under us," says Goodall. Before the agency could move its existing business from Frontier, Frontier sent a letter announcing that state regulators required that the company cease doing business.

"But we were lucky," says Goodall in hindsight. The agency's list of carriers included several which, combined, absorbed all of the agency's business still on the books at Frontier, Observes Goodall, "The lesson is never to put all your eggs in one basket."

Frontier Insurance entered voluntary rehabilitation in New York in August 2001.

Since January 2002, regulators have placed 12 companies into supervision, receivership or liquidation. In many cases, agents had to scramble to move business or to get paid for business they had already placed.

How to know when one of your carriers is in financial straits before a ratings agency-or a regulator-takes action? There can be early warning signs. Recognizing these signs can give you valuable time to contact your clients and move their coverage before news of a carrier's woes hit the press-and your pocket.

A.M. Best, Standard & Poor's, and Moody's all issue company "Outlooks" that explain why they've given each company its current rating to the carrier in question. In general, these outlooks also provide information on the company's expected direction over 12 to 24 months.

All three rating agencies also issue credit watches, or in Moody's case, rating reviews about 90 days before changing an insurer's rating. Even better, all three also offer a ratings-watch subscription service. As a subscriber, you receive an e-mail alert each time the agency takes any action on the carriers) you specify. Standard & Poor's e-mail alert service is free; A.M. Best and Moody's charge a fee. For comparison's sake, it's not a bad idea to subscribe to the ratingswatch services of all three agencies.

The ratings agencies will list various actions by companies that will serve as warnings. "The biggest thing for an agent to watch for is high growth in a carrier, particularly if that growth comes from new policies," suggests Matthew Mosher, group vice president of property/casualty ratings at A.M. Best. In today's market, Mosher expects carrier growth to stem from premium increases or mergers and acquisitions, but not from new business.

"Companies with rating issues now are usually dealing with capital shortfalls," Mosher explains. Acquiring significant amounts of new business could signal that the carrier has relaxed its underwriting standards in a dubious attempt to boost cash flow. Loosening underwriting standards during the current heavy-loss period, which gathered momentum after 9/11 and continues with a number of catastrophes since, would almost inevitably create more shortfall down the road.

"Any company that has a commentary (from A.M. Best) on concerns about capitalization, even poor earnings, is a warning sign," cautions Mosher. Agents should always check a company's ratings outlook, and the embedded rationale for the rating, whenever a ratings agency issues a commentary. "The outlook and rationale provide a lot of information about why our rating is what it is," says Mosher. Thus, the outlook and rationale can provide significant insight into a carrier's probable future.

Steve Dreyer, managing director, insurance ratings at Standard & Poor's, explains the criteria his company uses to issue a credit watch. "We only issue a credit watch to companies that experience a nearterm or developing event," says Dreyer. A carrier's pending sale, change in underwriting habits or change in lines of business would constitute three such events. But there are many subtle indicators.

"Agents should ask the same questions we ask," Dreyer advises. Changes in management, for example, can be positive developments. But why might a CEO resign suddenly or take an early retirement? By the same token, why would a company revise its underwriting standards? Doing so could signal an intention to withdraw from a state or line of business.