Life Insurance Company ratings - still useful?
Recently, I was asked to comment on Standard & Poor’s positive reference to the Life Insurance industry sector in NZ. I have to confess at the time, I didn’t give this too much thought and regarded the rating agency’s view as fairly self evident.
However, further thought on the matter raised some issues which I think are worthy of consideration.
The first issue is an age-old concern that the parties which are being rated pay the rating agencies for the privilege. So S & P and A. M. Best rely on the companies being scrutinised for a substantial portion of their revenue. I can confirm from first- hand experience that the amounts of money involved – particularly for large international organisations – are very substantial indeed.
Now, don’t get me wrong, I’m not suggesting that you can ‘buy’ a rating. But I’m equally certain that most financial advisers do not select and recommend products based solely on commission levels.
All the same, immediately prior to the collapse of AIG, the organisation retained a AA+ S & P rating right up to the point when it became obvious that such a rating was entirely inappropriate.
The second issue which made me pause for thought was the arrival of the prudent insurer regulation and the relevance now of the mandatory rating for insurance companies.
If the supervision of capital management, solvency, and other related financial aspects of the industry is effective, what is the necessity of having expense allocated to obtaining a rating every year? Surely effective regulation has superseded the need for such an exercise, particularly with the audience for which it is intended having scant understanding of the concept.
Oh sure, I suspect most consumers understand that AAA is good – and everything else is not so good. However, I question whether there is even a modest appreciation of the rating structure beyond that. S & P also talks about ‘claims paying ability’ and ‘financial strength’ – both of which should surely be implicit in the prudent regulation provisions.
Finally, another oft-posted question – how many life insurance companies have failed to meet their obligations to policyholders in the modern era?
Perhaps it’s time we took a broader view of the regulatory environment in the context of legislation which prevailed in the past?
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