Rating Downgrade Triggers PII Concerns

Standard and Poor downgraded eight European insurers this week, including Allianz’s Italian operation and Ageas’s Portuguese unit. Whilst these are big name insurers, the operations affected are the overseas companies, rather than the main European arms. The ratings downgrades follow on from the downgrading of the sovereign ratings of 17 Euro zone countries at the end of last week.

However anyone breathing a sigh of relief should think again. The rating agency has yet to decide on the ratings for some of the biggest European insurance groups.

“We have not yet completed our review of the effect of the sovereign actions on Allianz Group, Aviva Group, Axa Group, and CNP Group and have therefore not taken any rating action on these groups” S&P said in a statement.

A downgrade on any of these major insurers will result in significant problems in the market not just for the insurers, but also for brokers who recommend their products.

The insurance industry has long been proud of its gold standard A ratings and this simple measure is used as an indicator by many brokers as to the financial security that the institution presents when recommending products to customers. What is worrying about the current market is the fact that ratings are not, as is traditionally the case, slipping by a small margin, but are in some cases dropping through the floor.

Groupama is a good case in point. Here is an insurer with good reserving practices, a conservative approach to risk and a good record on underwriting, who many brokers would have recommended with confidence in May last year. However the company has seen their ratings tumble in from a healthy A- in May 2011 to BBB- in December 2011.

The problem with the headline grabbing downgrade is that brokers and customers start to get nervous. Groupama are putting up a good case to defend their reputation – they have reminded the market that the UK operation is independently capitalised and ring fenced by the UK regulatory regime with a solvency margin of around 190% and an investment portfolio that is in sterling with no exposure to Euro-debt. So in many ways this is an insurer brokers should still be able to recommend and that customers should have confidence in.

The issue of course is that the insurers have used their A ratings with such success in the past as a benchmark that it is difficult to reverse that mindset. Insurance brokers are conscious that their professional indemnity cover is rated on the amount of business that they place with insurers who do not have an A rating and their customers often demand a rating of A or above to secure contracts with councils, large companies and government bodies.

Groupama is a comparative minnow when looking at the likes of Aviva, AXA and Allianz. If the ratings for these huge insurers are downgraded and they suffer the same loss of confidence from the market then the insurance market will be in for very turbulent times.

All of this presents real challenges for insurance brokers and IFA’s who will need to consider long and hard the financial prospect of the insurers that they recommend if they are to avoid a professional indemnity claim being made against them. Bearing in mind the speed at which ratings have dropped, the recommendations that an broker or IFA makes will need to be well documented and take into account factors which go deeper than the S&P rating which will provide the insurer with the ability to survive a crisis of confidence.

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