Media - Taking the Litmus Test
More and more Insurance is being sold as a commodity rather than as a service. The reasons for this are mainly concerned with the ability of technology to deliver financial service products remotely from the customer thereby saving the insurer and the intermediary agencies both time and money in making a sale.
The unintended consequence of this remote selling is that, as the years go by, the customer/ client gets to know less and less about what they need, what they are buying and even more importantly from whom. They are buying “blind”. This is already causing more than 50% of the insuring population to be underinsured and also insured with inappropriate cover because the customer is induced to buy insurance on price alone without any proper consideration as to the value of the insurance, or insurer, on offer.
It is not only consumer insurances that are sold remotely but many of the smaller businesses and SME’s are targeted by insurance companies for sales by remote computer technology. The assessment of the risk, the calculation of the premiums and terms the issue of the policy documentation is all carried out without human intervention; and the result is that the buyer is buying "caveat emptor" - let the buyer beware.
Competition for a share of the insurance markets in the UK is fierce and insurers from all over the world are eager to get a slice of the action but few insurance buyers ever stop to think “who is insuring me?" Will they, can they, pay a claim? Being insured with an insurer that might not be there to pay its claims is to take an unnecessary additional risk. Dealing with an insurer in a remote, foreign country is not easy.
If the insurance company is not there to pay the claim (i.e. it has gone bust) your policy is worthless. Furthermore, if you have a compulsory or contractual requirement to have insurance, and if the company goes bust you may be in breach of regulations which carry a penalty or be in breach of contract for which you could be sued for damages.
The Credit Risk of an insurance company can be measured by reference to the Credit Rating Agencies. All insurers are now given a credit rating by one or more of the recognised Credit Rating Agencies ( Standard & Poors A.M. Best and Moody's); and they value their credit rating as a badge of strength. The ratings range from AAA+ to BBB- and at any given time there can be some 300 insurers with a rating of 'A-' from the rating agencies. We have regularly seen periods when as many as 60 of these have had a negative outlook or creditwatch.
Under S&P's definition, a negative outlook suggests that there is a greater than one-in-three likelihood that the rating will be downgraded into the BBB range. Insurer credit ratings are an informed opinion of the rating agency (they are not guarantees) and they indicate an analytical view of the medium-term probability that the insurer will meet its future obligations to policyholders.
At Flaxmans we believe that there is an increasing need for policyholders and brokers to take notice of the rating level of their insurer because poor quality insurers regularly go out of business after a short foray into the market offering bargain basement premiums to attract customers; leaving some of those customers with an unpaid claim and a loss from which they cannot recover.
For a detailed and informed understanding of the Credit Rating of insurance companies see The Litmus Ratings Guide at http://www.litmusanalysis.com/
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