Row erupts over strength ratings
On November 15 it became mandatory for life insurers to have and display "financial strength" ratings from the likes of global credit ratings agencies Standard & Poor's and AM Best.
But views on the value that ratings offer are polarised.
Sovereign, Onepath and AIA, all of which have very strong ratings, see them as critical and claim there is not enough respect for them among insurance brokers.
New insurer Partners Life and smaller insurer Pinnacle Life, however, are quick to criticise the value of such ratings, and claim those trumpeting them have an agenda to stifle competition from smaller rivals.
Onepath Life's John Body said some advisers were operating as though the financial strength of insurers was of no importance. He saw no evidence of a link between the strength of ratings and the premiums companies are charging.
It was a veiled swipe at Partners Life, which has been taking business off major insurers, Onepath especially, by wooing insurance brokers with large commissions if they switch clients' to Partners.
"An insurance policy is in a lot of ways like a bond," Body said. "It comes with a bubble payment some time in the future, and you want to be very sure that your insurer can make that payment."
The ratings give the best insight available into that ability, he said.
And it is not just life insurance payouts at stake.
Life companies often sell income protection and permanent disablement policies, which can result in an insurer making payments to a policyholder for decades. Further, if an insurer went bust, older policyholders might struggle to get similar cover elsewhere due to deteriorating health.
Charles Anderson, chief executive of Sovereign, said people must realise the Reserve Bank now requires ratings because it believes them to be important. Insurance is a relationship that requires the financial strength to keep making payments for many years.
Anderson shares Body's view that financial strength ratings are not always valued by advisers. In markets such as the US, unless a company has a strong financial strength rating it would not make it onto most advisers' insurance provider panels, he said.
"Quite frankly, we are the only company in New Zealand with an A+ AM Best claims-paying rating. I believe that should drive at least some part of the decision-making process with people compared to a company that has a claims-paying rating just above junk," he said.
That's another swipe at Partners Life which has a rating from AM Best of B++.
The founder of Partners, Naomi Ballantyne, who was involved in the founding of both Sovereign and the business that became Onepath Life, said the big incumbents are trumpeting their ratings to limit Partners Life's growth.
While the ratings process ensured that insurers had to have good systems and processes, rating agencies penalised smaller companies, she said.
"Suddenly [ratings] are a hot topic because those companies like ours, which are new or small, struggle to get a credit rating even though we are well-managed and financially sound," Ballantyne said. "They [companies with higher ratings] think it means if you don't have an A++, you are going to fail which is the implied messaging from those companies."
More important, she said, are the reinsurance arrangements of companies. The earlier policies Partners sold shifted 82.5 per cent of the claims payment obligation to reinsurers, while new policies now shift 75 per cent of those obligations. "We don't carry the bulk of the risk. We have passed it off to a much larger international organisation which has no questions around its financial strength."
The ratings agencies say they take this into account, but Ed Saul at Pinnacle Life, which sells insurance online, said the penalty applied by raters for smallness is harsh. "A small company like us is never going to get an AAA credit rating even if the ratios and reinsurance treaties look as good," Saul said.
He says with highly rated Hannover Re responsible for paying 95 per cent of each claim on a Pinnacle policy, even if Pinnacle Life, which has a B rating from AM Best, had no money to pay a cent of claims, $95 in every $100 of each claim would still be paid.
"A person taking a Pinnacle policy is no more at risk than anybody going to a larger insurer," he said.
Besides, said Ballantyne: "If you have looked at the history of life companies going under, they don't."
But Anderson, who, having come from England, is familiar with the collapse of life insurer Equitable Life, won't have a bar of that, saying big events such as pandemics can happen. Anyone who doubts the value of ratings just needs to look at the stresses general insurers faced following the Christchurch earthquakes.
AMI needed a government bailout to meet its obligations, but it is not just general insurers that go bust in New Zealand.
New Zealand's Orange Insurance, set up to provide insurance and investment bonds to the clients of the now defunct Money Managers advice chain, went into voluntary administration in 2008 as a result of its troubled investments - including high-risk subordinated property loans - and was put into a liquidation in 2009.
The same nearly happened to the now-strong Fidelity Life back in the 1980s when its investments turned sour.
Would the Government bail such companies out in the event of a cataclysmic event such as a tsunami, killer flu pandemic or massive earthquake as it did AMI?
Some think not, because while a roof over people's heads is non-negotiable, the country has a benefits system to keep food on the table. A government is likely to see that as the end of its moral obligation to those individuals and families whose incomes have been cut by death or disablement.
Broker Nigel Tate, who is the president of the Institute of Financial Advisers, said he would tend to agree with the smaller insurers that their lower ratings cast them in a light that was not entirely fair.
Ratings play only a relatively small part in advisers' decisions alongside factors such as service levels and policy features. That accounts for Tate also seeing no direct link between ratings and premiums.
"I think practitioners take note of ratings, but I don't think it's what sways them one way or the other," he said.
Insurance is a people industry. The financial strength rating of Partners may not be the highest, but its growth track follows that of Sovereign and Onepath Life (called Club Life at launch).
Brokers trust that Ballantyne and the others involved with Partners Life know what they are doing and will replicate their success at previous companies.
"[Partners Life] is getting a lot of support from a close-knit group of brokers," Tate said. "It's a bit like Robin Hood. The Merry Men are following Naomi around. My real concern is about the rationale of people moving clients to them rather than their financial strength."
WHAT IS A FINANCIAL STRENGTH RATING?
Ratings are an opinion of comparative likelihood of a company going bust compared to another company rated under the same methodology. There is no guarantee a rating from any one ratings company is accurate, or that ratings from different ratings agencies can be considered comparable.
Garbage in, garbage out holds true for ratings agencies, which rely on information companies provide them, often audited information, but history has shown that to be unreliable from time to time. In 2005, for example, Rapid Ratings gave Bridgecorp, which failed in 2006, a glowing "investment grade" rating, noting: "Although operating at the riskier end of the market, in the past three years Bridgecorp has developed very sound credit approval and management systems."
Finance company Capital + Merchant had a four out of five star rating from Australian funds researcher PIR – "the authority" according to its website. Investors lost every cent they had invested in property loans supposedly insured with Lloyds of London.
Earlier this month Standard & Poor's lost a landmark case in Australia for completely stuffing up the rating of investments bought by local councils. People like to understand ratings in terms of the percentage probability that a company will default in a specific period of time.
Ratings agencies track their own performance, and publish figures that show the proportion of companies they rate that eventually default. But the past is no guide to the future.
Ratings agencies have shown themselves to have a spotty record on assessing risk during bubbles. Between 1981 and 2008 not a single non-bank financial institution rated AA by Standard & Poor's defaulted. In 2008, 1.49 per cent went bust. In 2009, that increased to 2.27 per cent.
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