by Curtis M. Pearsall, CPCU, AIAF, CPIA, President. Pearsall Associates Inc. and Special Consultant to the Utica National E&O Program
Over the next few months, rating agencies such as A.M. Best, Demotech, S&P, etc., will be carefully dissecting the financials for nearly every insurance carrier in the marketplace. Based on these reviews, there is the potential that some carriers’ ratings could change. Does your agency have a process in place to manage this key issue?
Managing Carrier Ratings
Every agency should have an established minimum financial rating for the carriers they do business with. While a minimum rating of “A-,” using the A.M Best rating approach, is common among agencies, how your E&O carrier addresses insolvency in the policy form should be a consideration.
As rating agencies begin to publish their findings, it is vital for your agency to have a process to secure the most up-to-date information. There are many approaches. Based on the number of carriers your agency does business with, including carriers used by the wholesalers you do business with, identifying carriers’ ratings can be a time-consuming process. It is suggested that agencies look for an automated approach to secure this key information.
A.M. Best has a tool that is part of its Key Rating Guide that provides email alerts on important information pertaining to various carriers. There is a fee for this service, but the information is timely. Visit www.ambest.com/sales/krg to learn more. The website includes a video demonstrating the guide’s capabilities and functionality to help determine if this approach is right for your agency.
Get It in Writing
Not many carriers are downgraded each year. For example, an agency could have a carrier going from “A+” to “A.” While agency management may want to examine the situation more closely, there will probably not be any further action needed. But what would your agency process be if one of your carriers was downgraded from “A-” to “B”?
If this happens, identify the clients with those carriers. If the carrier is used by a wholesaler, the wholesaler should be able to provide this information unless that information was captured in your agency system.
It is then suggested to give those clients a written notice. The document should explain the situation advising the client that the coverage was placed with an insurance carrier that was recently downgraded. The explanation of the rating as provided by the rating agency should be included. For example, in the A.M. Best methodology, a “B” rating is defined as “Fair,” a “B+” is “Good,” etc.
Inform your client that you are not in a position to attest to the carrier’s future status and that there is the potential for the carrier to be unable to satisfy its obligation to pay claims. A primary goal of this written document is to educate the client to enable
them to make an informed decision on whether they want to continue or discontinue coverage with the current carrier. Include language advising the client that the agency would be willing to remarket the account to a carrier with a higher rating. In addition, tell the client that there is no guarantee that the premium will be equal to or less than what the client is currently paying or that the coverage will be identical.
The client must make a decision and communicate that decision in writing to the agency. In essence, what direction does the client want the agency to take? Some agencies have the choices noted on a document and require the client to check the box that indicates their decision.
There may not be many carriers whose rating changes in 2017, but what if one of those carriers is one you do business with? Make sure you have the necessary process in place.