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| | Insurance Companies Come Clean About Claim Payment Policies
By Michelle Logsdon - May 2, 2002More insurance companies are requesting a rating by Standard & Poor’s (S&P) to show their willingness to pay claims, according to S&P reports released at the end of April. The Financial Enhancement Ratings (FER) was created in mid-2000 as a means to quantify multi-line insurers’ likelihood to pay claims on time, or at all.
Insurance companies seeking the rating are those that offer credit enhancement underwriting policies where the insurer accepts responsibility for certain risky transactions related to underperformance or non-performance of specific assets, cash flows or counter-parties.
An insurance company with a good rating adds value to these transactions by backing them as a third party.
The need for FERs arose out of structured financial transactions and guarantees becoming more complex over the years. In the past, mono-line bond insurers dealt with these claims but multi-line insurers joined the market as the transaction complexity increased.
A significant difference in processing claims came to the forefront as multi-line insurers entered the situation. According to the report, “Multiline [sic] insurers and investors tend to have different expectations about credit-enhancement insurance. From the insurer’s perspective, claims against traditional property/casualty insurance policies may very well be questioned before payment is made. By contrast, the capital markets have become accustomed—by virtue of the practice of monolines [sic], letter-of-credit providers, and financial guarantors—to expect immediate and full payment if the primary obligor is unable to pay.”
Capital markets expect payment readily or they do not consider any value to be added to the structured transaction despite the fact it is insurance-wrapped.
The FER rating is withdrawn from insurers that dishonor a policy claim for any reason. S&P would also consider lowering the company’s financial strength rating.
Insurance companies with an FER rating are listed in Table 1 - Insurers With Financial Enhancement Ratings.
Full text of the S&P reports can be seen at “Financial Enhancement Ratings Help Reconcile the Cultural Differences Between Multi-line Insurers and Financial Guarantors” and “Revised Financial Enhancement Ratings Gauge Insurers’ Willingness To Provide Timely Payment.” |
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