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Chapter 9 Reinsurance market 9/27

E5 Ongoing review
Ratings are formally evaluated at least once every twelve months and following significant events, such
Ratings are formally
as an ownership change, merger or recapitalisation. All ratings, however, are continually re-evaluated for evaluated at least
other changes arising during the year, and agencies will try to maintain regular dialogue with a once every twelve
months
company’s management. In the light of any developments, the ratings can be moved up or down
according to the assessment made of evolving circumstances.

E6 Significance
The importance of financial strength ratings cannot be underestimated. A new company would not
usually receive a rating because it has no trading history. Rating agencies would probably prefer to wait
for three years of annual reports and accounts to be published before they would consider assigning a
rating. This is especially true for reinsurance companies writing long-tail business. Some companies in
the market might be of insufficient size for rating agencies to consider them.

Example 9.6
In late 2008 A.M. Best assigned a financial strength rating of A- (Excellent) to Nissan Global Reinsurance Ltd (NGRe)
based in Hamilton, Bermuda. The outlook assigned is ‘stable’ and notes its excellent operating performance since
the company’s incorporation in 2005. At the time of writing, its rating is unchanged.

Without a rating, a reinsurer will sometimes have difficulty in attracting brokers and reinsureds to place
business with it, especially if the start-up capital is considered to be inadequate, irrespective of the
perceived qualities of the individual managers and other staff of that company. This applies both to new
entrants to the market and to smaller existing reinsurers.
Certain insurance companies will not place business with a reinsurance company unless it has some
form of ‘A’ rating, and they would be perfectly within their rights to make such stipulations. It, therefore,
follows that reinsurers with some form of ‘B’ rating would not have the opportunity of writing that
insurer’s business.
The poorer the reinsurer’s rating, the more the reinsurer might be selected against. This means that the Reference copy for CII Face to Face Training
reinsurer tends to be offered poorer-quality business that is proving hard to place with reinsurers
enjoying stronger financial security.

It follows that companies are very sensitive to movements in their ratings, a downward rating inevitably
Companies are very
raises concerns, potentially putting the downgraded reinsurer in the position of having to justify itself to sensitive to
its clients. In effect, ratings can become self-fulfilling prophecies, strengthening the position of strong movements in their
ratings
companies and further weakening the position of companies experiencing difficulties. Indeed, it has
become common for reinsurance treaties to contain a special termination provision, enabling reinsureds
to terminate the contract if the reinsurer fails to maintain a stipulated rating.
Unsolicited ratings can also create some irritation. Occasionally, rating agencies will give a rating in
advance of being asked to do so, when obviously they can only base their assessment on published
information. In such an event, the rating agency concerned will clearly identify that any rating is based
solely on information in the public domain. This was the case initially for Lloyd’s syndicates.
Subsequently, Lloyd’s invited Standard & Poor’s and A.M. Best to undertake formal annual ratings with
Lloyd’s cooperation. Lloyd’s syndicates must now identify their potential loss involvements arising from
RDS, an example of which follows.

Example 9.7 Chapter
One of the disaster scenarios is a hurricane, which cuts directly across offshore oil platforms in the Gulf of Mexico,
before making landfall in Texas and moving over the densely populated Houston area. This test was introduced in 9
recognition of – and to examine – the significant correlation between onshore and offshore risks to hurricane events.
The scenario and guidance draws on a wealth of underwriting experience and is used by energy underwriters
worldwide as an industry standard approach to offshore energy risk management. This kind of active exposure
management helped mitigate losses from Hurricanes Katrina and Rita. Through its ongoing work on RDS, the Lloyd’s
Corporation is helping the market to prepare for each new storm season.

This form of ‘testing’ has been imposed by Lloyd’s but rating agencies will consider these important
disciplines to be only an adjunct to their own assessments.

Useful website
View the RDS Scenario Specification 2017 at http://bit.ly/2FxB77U.