Carrier Rating Downgrade Handling

By Ken Kukral

It seems that lately there have been a few rating downgrade by AM Best.  It is my own personal opinion that their reluctance to downgrade a carrier from an A- to the B’s (B++, B+, B or B-) has subsided and it has set off a wave of rating downgrades (not sure if three carriers I am familiar with constitutes a wave, but it is more than I have seen in quite some time).  Some of the inherent problems of these downgrades are as follows:

–        Any rating downgrade is something to take notice of and review their situation.  Both long and short term.

–        Does the carrier’s rating continue to meet the requirements you set for your office in terms of “minimum acceptable rating”?

–        Does the rating still meet the threshold of your E&O carriers insolvency exclusion giveback endorsement? (Most are at B+ V or better to not be subject to the exclusion, but many policies vary)

–        AM Best also gives an “outlook” adjunct to the rating which gives the future outlook opinion(with positive implications, stable or with negative implications).  This gives you a sense of direction of where the rating is “most likely” to go (not a guaranty , but an informed opinion)

–        There are “unwritten rules” that are in place that gives a minimum of a 3 year timeline to get the rating back up to an A rating.  Major capital infusions and many other improvements will not help speed up this process. (in my experience)

–        The rating could down AGAIN

So what should you do?  (If anything?)  Some of my thoughts….

  1. Learn more.  Read the press release that AM Best put out and look for any that the carrier put out in response to AM Best.  Do other internet searches.  Contact senior management at the carrier to find out more what they know (including the “untold story”) and what their plans are to address the situation.
  2. Look at what your “exposure” is.  How many policies do you currently have with the carrier and is it “longer tail” business that could take years for claims to be reports and necessitates a long term financial stable carrier.
  3. What is your agencies “crises response” strategy for dealing with carrier downgrades?  Do you have one?  Does your E&O carrier have resource material you could design one off of?  Keep in mind that you need to be consistent in how you handle these situations.  This leads to a ton of questions such as:
  • “Should I immediately move these accounts away from the downgraded carrier?”,
  • “Should I sent written notification to all of the accounts I have written with this carrier and give them an option to move the coverage elsewhere?” ,
  • “Should I give accounts coming up for renewal with this carrier an alternative quote in addition to the renewal quote?”,
  • “Should I spread the risk for this insured to other carriers by moving part of the program, such as leaving the primary with the downgraded carrier and moving the excess?”
  • “Does the primary carrier’s rating still meet the requirements for the excess carrier?”
  • “What constraints will I have in moving these accounts (such as how long it might take to get the return premium)”
  1. Keep in mind that many times a carrier who has been downgraded may set up an arrangement known as “fronting”.  What this means is that they will continue to do business, but another carrier’s “paper” will be used.  The “fronting” carrier usually gets a 5 to 10% charge for the use of their paper.  Their risk is that if the carrier that they are fronting for ends up going belly up, they are assuming their risk.  It is important to investigate the financial strength of the “fronting” carrier since they could quickly be taking on a load of additional risk.

The best advice I can give is, contemplate these issues NOW rather than in the midst of a “crisis” that arises.  This will allow you to make much more “level headed” decisions and fewer “knee jerk” reactions that you will regret in the future.  Start looking at your existing carriers whom have A- ratings and learn about them NOW, rather than when or if they get downgraded.   The A- to B rating is perceived in the business as a “cliff” and a significant drop off.  It is nothing to be taken lightly.  Many of the insolvencies in the past were progressive rating drops and it was not all in one swoop.  It truly depends on if the carrier can “stop the bleeding” and make moves that will shore them up financially and move them towards potential future rating upgrades.  Does the carrier have the plan AND the leadership necessary to make this happen?  Silence is NOT GOLDEN after a rating downgrade.

One parting word….  The Guaranty Fund is NOT your friend…..

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