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E Financial strength ratings

Another feature of the world’s reinsurance markets is for reinsurers to be rated by a third-party rating
agency for their claims-paying ability.
If what is being bought and sold in these markets is the promise to pay claims, an evaluation of the
financial strength of the party proposing to make that promise is a key task for the party proposing to
accept that promise. Otherwise, the intended risk transfer may fail if, for example, the reinsurer is in
financial difficulties and, at worst, becomes insolvent.
Even though the reinsureds and their agents make their own evaluations, there is much demand on all
Much demand for
independent and sides for independent and external ratings of an insurance company’s or reinsurance company’s ability
external ratings to pay its claims. In fact, being rated could be said to be a prerequisite for reinsurers wanting to conduct
reinsurance business.

E1 Role of rating agencies

Ratings were not an important feature for many international companies outside North America until
relatively recently. In contrast, there has been a long history of rating debt and rating claims-paying
ability in the USA. Initially, rating agencies used information that was publicly available but they were
soon able to persuade companies that an informed and accurate rating required a more detailed
examination.
Today, because reinsurers realise that reinsureds are looking for financially secure reinsurers, they
will often invite one or more of the rating agencies into the company to provide an assessment of its
claims-paying ability. This inspection is not the same as a rating for the issuance of debt. Debt
assessment is separately evaluated. Although reinsurers usually ask the rating agency to give it a rating,
they still pay for such rating to be undertaken. Effectively, a company will use the subsequent rating as a
marketing tool to confirm its financial security.

E2 Rating factors Reference copy for CII Face to Face Training

Company ratings are assessed against broadly similar factors by each rating agency. A typical range of
factors would be an assessment of the company’s financial strength, its operating performance and
market profile, which culminate in an overall assessment of its claims-paying ability.
In assessing a company’s financial strength, the rating agency will look at principal factors such as:
• amount of capital and the company’s ability to access capital;
• quality and effectiveness of its reinsurance programme;
• adequacy of technical reserves;
• quality and spread of investments; and
• liquidity.

For its operating performance, it will look at factors such as:
• profitability;
• sources of business, nature of premiums and investment income; and
• all aspects of its management experience and associated objectives.
9 Market profile represents the totality of the company’s activities, the way these activities are
undertaken, and the characteristics of the markets in which a company operates.
Chapter Typical considerations are:

• risks associated with the classes and territories in which business is written;
• competitive market research;
• general and financial management;
• underwriting and claims management; and
• exposure to large single risks and ‘event’ risk. This could arise from contentious litigation caused by
casualty or liability business, perhaps as a result of a dispute with a trading partner. Losing an action
at law could significantly increase a reinsurer’s outstanding liabilities. Changes in legislation could
also materially increase a reinsurer’s existing and future liabilities as could incurred losses arising
from catastrophic events caused by fundamental perils, especially if a rating agency considers that the
reinsurer has purchased insufficient retrocession coverage.