The Financial Health of
Insurance Companies
Looking at the financial strength ratings of insurance companies is
one way of assessing their long-term ability to pay claims 20 years from now
Joy Gänder
CPCU, ARM, principal,
Gänder Consulting Group, LLC
Editor's Note: This article is reprinted with
permission from the Wisconsin Association
of School Boards.
The most worrisome longterm
liability concern for
Wisconsin public school
districts is a sexual assault
claim involving a minor
— not only because of
the harm caused to the child involved,
but because a civil claim alleging sexual
assault can be initiated until the alleged
victim turns 35 years old. 1 Thus, a
school district may not even become
aware of an incident until decades later.
Currently, there are at least two pending
lawsuits against Wisconsin public
school districts involving sexual abuse
and/or molestation allegations from
incidents occurring prior to 2000. If
similar allegations are filed against your
district, a defense is needed. Will the
insurance company you contract with
in 2020 be around if or when claims
are presented 20 years from now?
Financial Health: It Matters
All things being equal, how does
one assess the financial health of
an insurance company? Amongst
other things, pay attention to the carrier’s
financial strength rating. Some
insurance companies have become
insolvent and unable to pay claims. It
happened here in Wisconsin. Legion
Insurance Company/Villanova
Insurance Company insured several
Wisconsin public school districts.
When Legion’s financials went south,
they went quickly.
18 August June 2020 2019 • Taking Care of Business • WASBO.com
• January 2000: A.M. Best, a
worldwide credit rating agency,
assigns an A rating to Legion.
• January 2001: A.M. Best decreases
Legion’s rating to A-.
• February 2002: A.M. Best assigns
Legion a B rating with negative
implications.
• April 1, 2002: Legion is ordered into
rehabilitation.
• July 28, 2003: Legion is
ordered into liquidation.
In 2013, some Legion-insured
Wisconsin public school districts
received claim reimbursements from
the liquidator, though it is unknown
whether the payments equaled 100%
of the claim paid upfront by the school
district.
Depending on the class of claim, other
districts received nothing. Oddly
enough, when Legion was placed into
rehabilitation to hopefully regain its
financial footing, the company was
financially solvent. It is worth
repeating: Legion was solvent, but still
ordered into rehabilitation. 2 Even with
exceedingly tight budgets, purchasing
insurance from the most financially
strong carrier absolutely matters; even
if at higher premiums.
Will the Wisconsin Insurance
Security Fund reimburse
us for claims if my carrier
is liquidated? Maybe. But it will take a
while to receive the reimbursement, if
there is any. Your district may not even be
eligible for any reimbursement from the
fund if its net worth (“net position” for
public entities) is valued at
$25 million or more.
How do financial strength
ratings work?
Property and casualty insurance companies
often apply for or receive financial
strength ratings, which are opinions on
carriers’ financial strength and ability to
meet ongoing insurance policy obligations,
like paying claims. There are five
prominent players in the ratings business:
A.M. Best, Weiss, Fitch, Moody’s and
Standard & Poor’s. Of these, A.M. Best is
the oldest and issues the most financial
strength ratings, with Weiss rating the
second most.
Obtaining a financial strength rating
from Best comes with a price — literally.
In return for a fee from the
carrier, Best performs quantitative
analyses of carriers’ financials, reserving
and pricing policies, reinsurance
arrangements and capital management
strategies. It also conducts qualitative
research, usually in the form of interviews
with top management, to
understand the overall strategic
direction of the company. 3
Weiss issues ratings based solely on
publicly available information, and
carriers do not pay for a Weiss rating.
Weiss’ revenue comes from the consumers
and companies who buy the
ratings. Per the U.S. General
Accounting Office, “Weiss places far
less reliance than the other agencies
on analysts’ judgment.” 4
Are ratings from credit rating
agencies equivalent to one another?
No. An A- from Best is not the
same as an A- from Weiss or Fitch.
Best, Weiss and Fitch all use letter grades,
with or without pluses or minuses, but
the distribution of comparable ratings