June 2020 | Page 19

between them is different.
Approximately 72% of the carriers rated
by Best receive an Excellent (A-) to
Exceptional (A++) rating. Weiss ratings
tend to distribute more moderately with
only 35% of companies receiving a
rating comparable to the same Best
category. 5 Weiss is known as the “hard”
grader and is usually one full letter grade
below Best (e.g., a carrier with an A-
rating from Best will likely receive a
B- rating from Weiss). Fitch’s BBB is
comparable to Best’s A- rating. 6
What ratings are acceptable?
According to a white paper
prepared by Fitch Ratings, “most
commonly rating users (insurance
buyers and those employing contractors,
bond underwriters, etc.)
employ a minimum ‘A-’ rating
standard. Stated another way, rating
users will place insurers on their
“approved” list if they are rated A- or
higher, and leave the companies off
their approved list if rated below A-.” 6
As noted earlier, however, an A-
rating from one organization is not
the same as an A- from another.
Even so, all other things being equal, an
A- from Best or B- from Weiss are often
the minimum ratings acceptable to, and
recommended by, most independent
risk management consultants (those
who do not sell insurance) and international,
national and regional insurance
agents and brokers. Locally, the University
of Wisconsin System requires its
universities to contract with vendors
that carry insurance with a company
rated no less than A- by Best. 7
Why fret over ratings as long as you
choose one in the secure range,
which for Best begins at B+? Rating
agencies divide their ratings into two
general groups: secure and vulnerable.
Best’s secure group begins with a B+
rating and goes up by five more levels
to A+++. Insurance agencies and brokerages
usually set the minimum
acceptable rating bar at no less than
A- on the Best scale. Although a B+ or
B++ rating is considered secure, over a
15-year period, companies with those
ratings have impairment rates nearly
double of companies rated A or A-. 8
Weiss’ secure group starts at C- and
improves from there. Insurers rated at
the bottom of the secure range are
more likely to fall into the vulnerable
range and are more likely to become
impaired or insolvent. 2
What if a carrier doesn’t have a
current rating from Best? Do your
homework and gather information. If
a carrier doesn’t have a rating from
Best, ask the carrier why and obtain
the response in writing.
If a carrier had a rating from Best, but
withdrew from the rating process, ask:
• How many years did the company
have a rating from Best?
• What were its ratings over the last
five years that a rating was issued
(any discernible trends)?
• What year did the company
withdraw from Best’s rating process?
• Why did it withdraw from Best’s
rating process?
Request these responses from the
carrier and in writing.
• Obtain the carrier’s Weiss ratings
and review its combined ratio
history. A combined ratio considers
a carrier’s premiums (money in)
divided by losses and expenses
(money out). A ratio of 100 or more
means the carrier is losing money on
its operations.
• Ask bidding agents to provide in
writing the last five year-end
combined ratios for the carriers
offering to insure your district.
• Are there discernible trends?
A Word About
Policyholder Surplus
Policyholder surplus is a carrier’s
financial cushion to pay claims
and expenses beyond what was contemplated
in premiums. It is a measurement
of how many unexpected losses the
insurer can absorb. Wisconsin’s Office
of the Commissioner of Insurance
reviews carriers’ policyholder surplus to
ensure statutory adequacy.
Ask carriers offering to insure your
district to provide a five-year history of
their net written premiums to policyholder
surplus ratio. The lower the
ratio of net written premiums to policyholder
surplus, the more financial
cushion the company has to pay for
unexpected or catastrophic situations.
Summary
Deciding which property and casualty
insurance company to buy from can have
potentially devastating financial implications
on your district 20 years from now,
so buying from financially stable carriers
is recommended. Have bidding agents
do the homework for you by obtaining
the following information from bidding
insurance companies. For the current and
last five years:
• A.M. Best and Weiss Ratings.
If no A.M. Best rating exists,
ask the questions noted previously.
• Year-end combined ratios.
• History of the carriers’ net
written premium to policyholder
surplus ratio.
For questions, review and interpretation of
ratings and ratios, call Joy Gänder, CPCU,
ARM, principal, [phone], Gänder
Consulting Group, LLC.
1. Wis. Stats. §893.587 and §948.095.
2. In Re: Villanova Insurance Company (In Liquidation),
No. 1 VIL 2002, “Liquidator’s Final Accounting, Plan for
Final Distribution, and Application for Approval of
Notice - Exhibit B,” Filed 10/31/18, Commonwealth
Court of Pennsylvania, http://bit.ly/2IJSJ4h
3. Tom Stephenson, “The Value of (or problem with) Rating
Agencies,” Robus Research, July 5, 2013.
4. William J. Kruvant et al., “Insurance Ratings – Comparison of
Private Agency Ratings for Life/Health Insurers,” (GAO/
GGD-94-204BR Insurance Ratings), United States General
Accounting Office, Briefing Report to the Chairwoman,
Subcommittee on Commerce, Consumer Protection, and
Competitiveness Committee on Energy and Commerce House of
Representatives, September 1994, gao.gov/products/
GGD-94-204BR.
5. The Weiss Approach ©2003,
WeissRatings.com.
6. “Not All Insurer Financial Strength Ratings Are Created
Equal,” White Paper on Lack of Comparability
of A.M. Best’s ‘A-‘ IFS Ratings to Those
of Fitch, Fitch Ratings, July 2016, fitchratings.com/site/
insurance/ifsratings.
7. See University of Wisconsin System information at wisconsin.edu/risk-management/manual/vendor-certificates.
8. “Best’s Impairment Rate and Rating
Transition Study – 1977 to 2014,”
Best’s Special Report – U.S. Property/
Casualty & Life/Health, Trend Review, August 21, 2015,
ambest.com/nrsro/
FormNRSRO_Ex1_RatingsImpairment.pdf.
June 2020 • Taking Care of Business • WASBO.com 19