Ratings increasingly sought: Shipperlee
Contrary to expectations that solvency ratios would start to be seen as a substitute for credit ratings, credit ratings are in fact becoming more important, Stuart Shipperlee, managing director of Litmus Analysis, told Baden-Baden Today.
“There was a widely held belief that once Solvency II was introduced, the use of ratings might diminish; one could look for companies with high solvency ratios rather than worry about credit ratings,” he said.
“That hasn’t happened. We believe this is because although the ratio is available to buyers and brokers, it puts the onus on them to decide what a good number is whereas the use of a third-party credit rating is essentially saying the agency has made that decision.”
He added that collateralised reinsurance-based solutions are increasingly looking to have traditionally rated balance sheets. He identified two key drivers for this.
“First, there are a lot of cedants around the world who would rather have rated paper. The consequence is that if you are an insurance-linked securities (ILS) fund, it limits your ability to diversify and to tap into all the most attractive business available.
“Second, within an ILS fund-backed collateralised-type structure it is very difficult, if not impossible, to do reinstatements. A rated balance sheet gives you flexibility to do that,” Shipperlee explained.
The other significant trend, particularly in the UK primary market, is for small and medium-sized insurers to publish BBB ratings.
“Small and small-medium insurers might be very strong organisations fundamentally but due to their size be incapable of getting an A- or higher rating,” he said.
“They are now seeking and publishing BBB ratings. They would much rather see a BBB which actually is a healthy rating than no rating at all,” he concluded.
“What is driving that trend is that a number of EU-domiciled insurers have failed in the last couple of years, and brokers who historically would use unrated capacity because they were the best price, or the big rated players who weren’t even in that line of business, now have concerns.
“Increasingly they would much rather see a BBB which actually is a healthy rating than no rating at all,” he concluded.
