Why an insurer’s credit rating matters
- Comparing the strengths of alternative liability insurers for your local authority can be like navigating a minefield
- It is important to think about how you would be protected, and the service you would receive from your insurer, following a significant loss or losses
- Failing to consider these factors carefully could result in paying out large sums for claims you thought were covered
The sharp rise in the size of liability and bodily injury claims in recent years will be of concern to all local authorities.
A variety of factors have contributed to this rise, including developments in medical technology and patient care, along with changes in regulatory approaches, public attitude and claim settlement trends.
Recent advances in medical science have led to claimants living longer and enjoying more fulfilling lives despite significant debilitating injuries. However, the treatments, technologies and medical support required to deliver these improvements are unfortunately expensive and often require extended periods of costly medical care.
Longer and better outcomes in turn have led to a growing number of Periodical Payment Orders (PPOs), where compensation is paid at regular intervals over many years, rather than as a single lump sum.
It is important to satisfy yourself that your insurer will be around in the years ahead to pay out such claims. If your insurer cannot pick up these claims, the responsibility for funding PPOs will fall back on you as the local authority.
Another important factor is the recent adjustment to the discount rate in the Ogden tables, the system used to ensure personal injury claimants are not over or under-compensated. This adjustment has meant that the size of some personal injury claims could more than double.
Given that a typical mid-sized personal injury claim can already run into several millions of pounds before the discount rate adjustment is factored in, local authorities will want reassurance that their insurer has the financial security to absorb such claims.
Russell Corbould-Warren, Head of Underwriting, Zurich Municipal, says: “The increase in the size of liability claims means that the financial stability of insurers should become an even more important criteria for local authorities to consider in the years ahead.”
Why it’s important to choose a financially secure insurer
In this context, it is perhaps surprising that in recent years some local authorities have stopped reviewing the credit rating of public liability insurers as part of their due diligence processes, while a number of unrated insurers have entered the public liability market.
An unrated insurer is one that does not carry a financial strength rating given by an international agency such as Standard & Poor’s, Moody’s, Fitch Ratings or A.M. Best.
This rating is an independent assessment of the financial strength of an insurer, and its ability to pay claims to its policyholders.
While a strong credit rating does not make a company immune to financial failure, it is the most objective measure of its financial security.
The consequences of lack of due diligence
You only have to look back to 2008 to see how local authorities can be affected by the failures of financial institutions. It is estimated councils in England and Wales lost more than £1bn when Iceland’s major banks collapsed.
A number of insurance companies have also gone into liquidation in recent years (see boxout).
So, why do some local authorities no longer review insurers’ financial ratings?
One view is that there has been a loss of corporate memory at some councils regarding the failings of major financial institutions, because of the high turnover of staff.
However, if your local authority would not consider using a bank that did not have a financial rating, it is worth asking why you would choose an unrated insurer.
Another issue surrounds who within local authorities is responsible for evaluating insurers.
From speaking to local authority chief executives, we know that many have been unaware their authority has chosen an unrated insurer. If something goes wrong, however, authorities need to ask ‘who within their organisation takes responsibility?’
Financial stability and a collaborative approach
Longevity, solvency and a strong financial rating can often demonstrate the stability that insurance providers can offer you and the communities you serve.
However, as Corbould-Warren says: “Financial stability is vital to choosing the right insurer but it is not the only factor to consider. We understand that local authorities don’t just want a stable, solvent and competent insurer; they also want an insurer that will hold their hand through the challenges they face.”
Partnering with a collaborative insurer that understands local authorities have a social responsibility to their people is also important, particularly during the claims process. We understand that and we share that social ethos – it’s a key part of the Zurich Municipal brand.