The failure of property and casualty insurers is not an uncommon event. In the past 30 years, there have been no less than 550 insolvencies of U.S.-based carriers.
When the insurance giant AIG nearly collapsed five years ago, it served as a wake-up call for risk managers to reassess their positions. Of course, we are all too familiar with the bailout U.S. taxpayers contributed to shore up that mess.
For operators, suppliers, users, and owners of cranes and rigging gear, insurance is a huge, ever-growing expense. A study by Moody’s investor services projected that rates would rise 7.5% on average in 2013 and could increase even more in 2014.
Insurance is one of those “necessary evils” we must deal with and pay for. It is a line item on your profit-and-loss statement that has no return on investment—until you have a loss. Then it is the best investment you’ve ever made.
We all pay premiums in anticipation that days, weeks, or even years from now the insurance we paid for will be there when we are faced with a claim, so it is imperative that we monitor the strength of our insurers.
The personality of this industry mandates that we not only have high limits of liability but also that that coverage be underwritten by organizations that are financially sound.
I am sure you are familiar with A.M. Best. It is an independent organization that monitors the financial soundness of all insurance organizations.
A.M. Best first reported on the impact that the 1906 San Francisco earthquake had on insurance companies. It is now the leader in issuing financial-strength ratings that measure insurance companies’ ability to pay claims. It also rates financial instruments issued by insurance companies, such as bonds, notes, and securitization products. A.M. Best historically has focused exclusively on the insurance marketplace, which is why it is considered the authority.
Much like bonds, insurance companies are rated on their strength. A++ and A+ are superior ratings, followed by A and A-, which are considered excellent. Concerns arise when ratings drop to B or anything below. Companies that have B ratings and below are considered vulnerable.
We also need to pay close attention to downgrades. These happen when A.M. Best feels that the rating for a carrier needs to change based on its current and projected financial strength.
Jeff McGeary of Allied Insurance Brokers told me it is critical to understand the impact a downgrade can have. “If your company is working on a jobsite where the minimum insurance carrier A.M. Best Guide rating requirements for contracting companies are A-, and the carrier is downgraded to a B++, your company could be excluded from that work as well as future potential business, until that carrier’s rating is either resolved or replaced to an A- rating,” McGeary said. He added that his agency includes A.M. Best Guide ratings for any insurance company proposed so current and prospective clients are apprised of their proposed carrier’s financial situation.
In a recent article published in Business Insurance, Linda Griffin of Argo Insurance Brokers Inc. was quoted as saying that Argo has seen carriers go from a B rating to insolvency in a matter of weeks. “Having open claims with an insolvent carrier becomes a management nightmare,” she said.
Kevin Cunningham of HIIG Construction said it is prudent to review your policy and the strength of the organization that stands behind it at least twice a year.
Take stock of your current carrier’s financial position and ask hard questions if there are any issues that would indicate a potential change in your carrier’s rating. Unlike AIG, the U.S. taxpayer isn’t going to bail them out.
