How does consumer trust affect financial ratings?

How does consumer trust affect financial ratings? | Insurance Business

How does consumer trust affect financial ratings?

Financial ratings have become a key feature of assessing an insurer’s position in the market, and they’re often one of the first things a potential client will look at when deciding who to insure with.

Ratings across New Zealand have historically been fairly solid, though more recent market developments have caused some fluctuation for the companies under the most pressure. According to Michael Vine, head of insurance research for S&P Global Ratings, events such as the Royal Commission have driven increased cost pressures, which thereby have the potential to affect a company’s financial rating.

“The interesting thing about established companies is that they generally have strong risk management structures and regulation, and so you’d think that their level of governance would at least be appropriate, if not very strong,” Vine explained.

“But we’ve recently seen many cases of where the framework may have been there in principle, but the application of that framework was either slow, misguided or simply wrong. We saw companies that had continued to charge life insurance to an estate of someone who had passed away, along with various other misconduct issues.

“This will likely mean higher compliance costs in the future, including both defence and legal costs, and probably some impact on premiums and charges.”

Vine says this could mean high premiums to pay for that added risk, or due to the amount of people who have dropped out of the system in the fallout. Distribution has also changed; there might be more telesales or more direct distribution for some types of business, and that would also have the potential to drive up costs.

The very real effect of this was felt keenly by companies such as AMP, which had its financial rating downgraded earlier this year as a direct result of the Royal Commission.

When it comes to New Zealand insurers however, Vine says the outlook remains reasonably strong – despite the ever-present threat of risks posed by natural disasters.

“Even though the events such as those of Christchurch were more left-field than many expected, the importance of a strong group reinsurance cover really stands out,” Vine said. “Regulation in this regard has improved over time – it used to be very light, but there have been many lessons and learnings since then.”

“The ‘A’ category means a solid financial position by our scale, and then it goes to BBB, which is still fair. Some of the more negative current outlooks are probably more group related, and in others there’s some flux from takeover or M&A activity, so that’s not strictly New Zealand-related.”

IAG and Chubb currently hold the strongest financial positions with AA- ratings and stable outlooks. No New Zealand insurers currently hold a rating lower than BBB+.