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Unrated insurers to be put through the Litmus Test

Unrated insurers to be put through the Litmus Test

Unrated insurers to be put through the Litmus Test Ask a regulator about their approach to unrated insurers and they will probably ask why you are even interested in using them. Yet the reality is that there is no legal requirement in place for an insurer to have a rating – and it’s also not a necessity for a broker to work only with a rated carrier.

Perhaps working with rated insurers offers more peace of mind as, in theory at least, that insurer should be monitored with due diligence carried out on its accounts. However, there may be financial benefits or other attractions to unrated carriers that catch a broker’s eye – but what, other than spending time laboriously pouring over their accounts, can you do to attain a similar level of peace of mind if you decide an unrated insurer could be best?

Now, there is an answer to that question soon to be launched on the market – in the form of BIBA’s Litmus Test Report. Insurance Business UK sat down with Peter Hughes, managing director of Litmus Analysis, to find out what the new technology is all about.

“The reality is that brokers – and smaller brokers in particular – have no real handle on the financial strength of an insurer, with the exception of ratings,” he said. “When they are unrated – and of course a lot of insurers are unrated – this becomes a real problem.”

“What we’ve done is to provide a service that gives them some key indicators about the financial strength of an insurer that is currently unrated. There is nothing like this on the market at the moment.”

Known as the BIBA Litmus Test Report, the tool will be available to members via the BIBA website and is expected to launch later this summer. It uses data from A M Best and is an online tool that aims to provide sufficient information to brokers to determine whether the financial health of a company is sufficiently strong or not.

“BIBA will be supplying this as a free service to their members,” continued Hughes. “It is based around a list of key indicators that BIBA members feel are important to them.

“There are eight key ratios which we source from publically available data and we compare them to a UK market average. We then divide that into five different categories – so if a company falls into the top 10 per cent for one of these ratios they will earn a ‘one’ for that ratio, and if they are in the bottom 10 per cent they will get a ‘five’.”

Ratios include an underwriting leverage ratio, an investment risk ratio, a credit risk ratio and a liquidity ratio.

“The value of this is simple,” he concluded. “If a broker feels the need to look into an unrated insurer then this makes the task much easier, it gives them a benchmark to follow.”

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