This Article first appeared in The Broker Magazine’s August 2021 issue
A handful of insurance carriers covered by the BIBA Litmus Test Report have failed. Stuart Shipperlee reviews what stood out in their profiles, and how currently covered insurers compare.
The BIBA Litmus Test Report (BLTR) is a facility available to BIBA members that supports broker consideration of the crucial issue of the credit profile of unrated insurance carriers. Five of the carriers covered by the BLTR since BIBA launched it in 2016 are now in liquidation. Twenty-seven live carriers are currently covered on an ongoing basis. Litmus Analysis provides the analytical content within the BLTR (based on carrier financial data from A.M. Best). The core of any BLTR is the comparison of eight* key credit analytic ratios with UK market benchmarks. This is shown by the assignment of a category to each ratio outcome from “strongest” (1 or 1!) to “weakest” (5 or 5!). We have analysed the characteristics of each liquidated carrier’s BLTR at the point they were still actively underwriting. Were the liquidated carriers looking weak relative to the UK market ratio benchmarks while still trading? To investigate this, we divided the eight* ratios into two groups: four that relate to capital and the remaining four that cover a set of other credit profile factors.
The picture for the five liquidated carriers appears quite striking and is shown in Table 1:
- Four had at least five out of the eight ratios in the 5 or 5! category (weakest)
- Four had at least three out of the four capital ratios in the 5 or 5! Category
- Across all five carriers, 65% of the ratios were in the 5 or 5! Category
*Note We concentrate on eight key credit analytic ratios, but the BLTR service actually benchmarks 13 ratios in total. However, five of these are repeated. For example, the four capital ratios are calculated and displayed both on “as reported” data and on “adjusted” data.
The latter reflect standard credit analyst data treatment and are the ones referenced here.
By contrast, for the 27 carriers currently being actively reported on in the BLTR service (shown in Table 2), we note that:
- Four have at least five out of the eight ratios in the 5 or 5! category (weakest) Five have at least three out of the four capital ratios in the 5 or 5! category
- Across all 27 carriers 22% of the ratios are in the 5 or 5! category
- 17 carriers have none or only one of the ratios in the 5 or 5! category
A complex subject
While we hope the BLTR is helpful to brokers, credit analysis of insurers is a complex subject and a BLTR is just one snapshot of an insurer’s credit profile. The facility comes with extensive explanatory and educational materials (and BIBA members are welcome to contact Litmus via BIBA on these or more generally).
Some key observations about these findings include:
- Examples of liquidation thus far are relatively limited; it is very important that the empirical evidence for the degree of correlation with BLTR ratio categories is not overstated.
- Potential sources of a new capital – if needed or desired – can include a financially strong parent group.
- Strong operating performance ratios can be seen by insurance credit analysts as a mitigant of weaker capital ratios (up to a point).
- A common reason for non-life insurer insolvency is materially inadequate prior-year reserving. Unfortunately, the BLTR does not contain a ratio for this as Litmus considers there is no sufficiently clear and benchmarkable ratio for reserve adequacy in this context that is derivable from carrier published accounts.
- Regulatory capital ratios, such as the Solvency Capital Requirement coverage ratio – the SCR ratio – required by Solvency II, are also shown in carrier BLTRs and can offer a very important additional perspective. Litmus will be examining the relevance of the benchmarked ratios shown in the BLTR service in further articles; do lookout for these.
“We have analysed the characteristics of each liquidated carrier’s BLTR at the point they were still actively underwriting. Were the liquidated carriers looking weak relative to the UK market ratio benchmarks while still trading?”
¹ calculated on a 2-year average basis. OUI = Other Underwriting Income. ² The last financial year of accounts that were available from A.M. Best for BLTR production prior to the carrier’s liquidation
Other than for Prometheus Insurance Company Ltd. (renamed from Tradewise Insurance Co Ltd. on 31/12/2019), the carriers in Table 1 had ratio profiles in their final (pre-liquidation) BLTRs that looked weak relative to the UK market benchmarks, even though the last available data was some time before liquidation. Prometheus appeared somewhat more positive as it did not have the majority of its ratios in the weakest category in its final BLTR. However, the company stopped publishing accounts after the 2015 financial year-end and so the data was old by the time it went into liquidation (2021).
¹ Calculated on a 2-year average basis. OUI = Other Underwriting Income. ² The most recent financial year of accounts that were available from A.M. Best for BLTR production as at 12th July 2021