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October 2015 Rating Downgrades/Watch-List

Thursday, November 05, 2015

The US Department of the Treasury published their Annual Report on the Insurance Industry in pursuant to Section 502(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Wall Street Reform Act), which requires the FIO Director to report annually to the President, the Committee on Financial Services of the House of Representatives, and the Committee on Banking, Housing, and Urban Affairs of the Senate “on the insurance industry and any other information as deemed relevant by the Director or requested by such committees.” This report is 105 pages so Veralytic has pulled for our readers a few things that are notable from the report (in no particular order):

  • The Report highlights "the growing role of alternative risk-transfer capital in the insurance industry. While this remains a small share of the total capital committed to reinsurance underwriting, its growth continues to put downward pressure on reinsurance premiums. The past year has witnessed continued growth not only in catastrophe bonds and other insurance-linked securities, but a very rapid pace of growth in industry-loss warranties and collateralized reinsurance. Once considered an innovative market segment, these alternative forms of risk transfer appear to be taking on permanent presence in insurance markets." 
  • The Report addresses "state-based capital developments involving risk-based capital (RBC) and principles-based reserving (PBR). RBC does not provide an integrated view of risk for an insurer, and some critics argue that RBC is too static and conservative, fails to adequately take into account the risks associated with increasingly complex life insurance products, and leads to the increased use of captive reinsurance. To address these concerns, state insurance regulators are considering PBR, which relies upon an insurer’s individualized risk modeling and analysis techniques, including the use of insurerspecific claims experience with specific portfolio(s) of business, to incorporate consideration of particularized risks and thereby more closely tailor calculations to the actual attributes of an insurer’s portfolio. When at least 42 states, representing 75 percent or more of premium, have adopted these revised reserving principles, a three-year PBR implementation period will begin for new business. Wholesale adoption of PBR continues to raises concerns, including potential overreliance on an insurer’s internal modeling and a shortage of resources and expertise on state insurance regulatory staffs."
  • The Report then considers the related issue of captive reinsurance. This subject received continued regulatory attention in 2014 and 2015. "For more than 10 years, the increased use of reinsurance captives—insurance company subsidiaries that provide regulatory capital relief to affiliated life insurers—has exposed life insurance contract holders to increased risk due to the significant amount of reserve credit (and higher resulting capital) that life insurers have been able to report because of cessions to these affiliated companies. In general, reinsurance captives are subject to less stringent regulatory requirements than commercial insurers. State insurance regulators are developing a framework for consistent standards for reinsurance captives that would allow lower-quality assets to support the so-called “redundant reserves” relating to term life and universal life with secondary guarantee products. The Report outlines FIO’s concerns about the scope and yet-to-be-determined specific details of the framework, including that reinsurance captives will continue to be established in states competing to serve in that capacity."
  • The Report goes on to describe the "rapid growth of indexed universal life (IUL) insurance, which now accounts for approximately 20 percent of all individual life insurance premiums in the United States. IUL products are typically sold with illustrations of guaranteed and non-guaranteed values under different market scenarios. State insurance regulators developed Actuarial Guideline 49 to provide guidance in determining index-based crediting rates for IUL policy recommendations. FIO encourages life insurers and the states to continue working cooperatively, and promptly, to adopt and implement a uniform framework for appropriate IUL illustrations. The Report notes that IUL policies are not subject to suitability standards at either the federal or state level, and recommends that state insurance regulators consider whether uniform, national consumer protection standards should be adopted for IUL." Read Veralytic's newsletter on AG49

Financial strength and claims-paying ability ratings of the insurer is one of the five factors of suitability.  The obvious reason being that insurance is most simply defined as an agreement for the payment of a premium today in exchange for payment of a claim at some future point, the more time between policy inception and the expected claim date, the more relevant the durable financial strength and long-range claims-paying ability to overall product suitability.

The less obvious reason is when an insurer's rating is downgraded, the change often means that either the insurer's profitability has declined, the insurer's reserves have deteriorated, or both. The insurer's most immediate response to a downgrade in its ratings, and its most effective means for restoring profitability and recovering reserves, can be to increase policy costs for cost of insurance (COI) charges and expenses. In other words, when ratings go down, policy charges are more likely to be increased, and thus premiums are likely to (need to) go up.

As such, high and stable ratings for financial strength and claims-paying ability are relevant to overall suitability both for the obvious reason of ensuring death benefits will be paid and because low or declining ratings can be an early warning sign for increases in policy charges.  Rating services like A. M. Best, Standard & Poor's, Moody's, Fitch and TheStreet.com continually evaluate insurance carriers for their financial strength (i.e., the profitability of the insurer's business operations) and claims-paying ability (i.e., the sufficiency of insurer's reserves compared with its future claims obligations). While rating services may focus on different key indicators or qualitative factors, all ratings reflect some combination of these two measures.

INSPECT WHAT YOU EXPECT! Use a Veralytic Research Report to measure policy expenses and know if a particular insurer is increasing or decreasing policy expenses. If you(r clients) do not know what they are paying for cost of insurance charges (COIs), fixed administration expenses (FAEs), cash-value-based "wrap fees" (e.g., M&Es) and premium loads in their life insurance policy holdings now, then there will be no way to know if or when such policy expenses are increased. Now is the time to find out.

Veralytic considers all available ratings from all ratings agencies when determining the financial strength and claims-paying ability ranking that is factored into the Star Rating for overall suitability of a particular product and assigns a full star in the Star Rating system to those insurers ranked in the top decile (top-10%), a 1/2 star to those insurers ranked the top quartile (top-25%), and no star for those insurers ranked even lower. For more information about the actual ratings from the ratings services of any of the insurers listed below, contact either an agent, broker or company representative of that insurer.  Or, for an independent, empirical and objective rating of a particular product to a specific client situation that considers both the insurers financial strength and claims-paying ranking of the insurer as well as essential information about the pricing and performance of the product based on all 5 factors of suitability, request a Veralytic Research Report.

October 2015 Rating Downgrades/Watch-List

During the month of October in 2015, ratings for the insurers shown below were downgraded or placed on the watch-list by one or more of the rating services that evaluate the financial strength and claims-paying ability of insurance companies.  Downgrades reported here are provided by VitalSigns, a service of EbixExchange, and are grouped their Star Rating and listed alphabetically.  This is not intended to be a complete list of all insurance companies and their respective rankings.

  The below insurers are rated a full-star within the Star Rating system due to ranking in the top decile (top 10% percent) among all insurers for financial strength and claims-paying ability according to the ratings of all the major ratings agencies.  Financial strength and claims paying ability is only one of the five star ratings. For a complete star ratings that consider the five major factors of suitability click here.

HCC Life Ins Co

Berkshire Life Ins Co of America

Munich American Reassur Co

RGA Reins Co

  The below insurers are rated a half-star within the Star Rating system due to ranking in the top quartile (top 25% percent), but not top decile (top 10%) among all insurers for financial strength and claims-paying ability according to the ratings of all the major ratings agencies.  Financial strength and claims paying ability is only one of the five star ratings. For a complete star ratings that consider the five major factors of suitability click here.

Allstate Assur Co

VOYA Ins & Ann Co 

  The below insurers are rated no-star within the Star Rating system due to ranking below the top quartile (top 25% percent) among all insurers for financial strength and claims-paying ability according to the ratings of all the major ratings agencies .  Financial strength and claims paying ability is only one of the five star ratings. For a complete star ratings that consider the five major factors of suitability click here.

American Continental Ins Co

Combined Life Ins Co of NY

Companion Life Ins Co

EPIC Life Ins Co

First Health Life & Health Ins

Florida Combined Life Ins CO

Life of the South Ins Co

Marquette Indemity & Life Ins

MedAmerica Ins Co

MedAmerica Ins Co of Florida

MedAmerica Ins Co of Florida

Merit Life Ins Co

Phoenix Life & Ann Co

Royal State National Ins Co

Use Veralytic to Monitor Ratings AND Policy Pricing

Financial strength and claims-paying ability of the insurer is only 1 of the 5 major factors of product suitability.  Because declines in ratings can signal increases in policy costs, the appropriateness of a policy should be re-evaluated when the insurer's financial strength and claims-paying ability rating is downgraded.  In order to fully assess the impact of recent ratings downgrades on your clients’ permanent life insurance portfolios, or to establish a baseline by which to judge the impact of future shifts in ratings, request a Veralytic Research Report now.  Just fax the detailed expense report along with the policy illustration toll free to 800-409-3222 or email to reports@veralytic.com to request a Veralytic Report for your client's policy.  If the policy illustration is not available, download a sample Request for Information (RFI) letter to gather the necessary policy information.

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Please note that different ratings services have different means and methods for determining when an insurer should be downgraded and/or placed on their watch-list, and thus different ratings downgrades and watch-lists have different meanings. For instance, only certain ratings agencies are registered with the Securities and Exchange Commission (SEC) as a Nationally Recognized Statistical Rating Organization ("NRSRO") and thus subject to SEC regulation and utilized by insurance regulators. As such, some insurers, agents, brokers and/or insurance consultants view NRSRO-registered ratings services as being a more credible indicator of a given insurance company’s reserves and claims paying ability.  For a list of these ratings services who are NRSRO-registered, click here.

In addition, certain ratings are “voluntary”, which is to say the insurer must cooperate with and pay a fee to the rating service for their rating of that insurer. Of course, this cooperation can result in a rating that is based on more information and insight into the financial strength and claims-paying ability of the insurer than that available to “involuntary” ratings services. However, this also means that insurers can “shop” for the most liberal “voluntary” ratings and are usually permitted to withdraw their cooperation when they feel certain public disclosures could hurt business.  Because ratings services depend on insurance company fees for revenues, and because ratings play a critical role in insurance sales and advertising, some insurers, agents, brokers and/or insurance consultants, therefore, view “voluntary” ratings as less credible due to possible conflicts of interest into the rating process (See U.S. Government Accounting Office (GAO) Insurance Ratings: Comparison of Private Agency Ratings for Life/Health Insurers – while somewhat dated, certain findings may again have relevance given recent criticism of certain ratings agencies).

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