AM Best ratings face pushback from some insurers

By Doug Bailey

The market dominance and fairness of the world’s oldest credit rating agency, AM Best, has come under fire recently as some insurers have questioned its methods and bemoaned its stranglehold on the industry.

AM Best, which has provided insurance industry credit reviews since 1899, is considered the “gold standard” in ratings, akin to the Good Housekeeping Seal of Approval or a Consumer Reports assessment. But some insurance executives say the agency’s grip on the market and wide consumer acceptance of its brand requires insurers to meet unreasonable standards to receive positive ratings.

“It’s not unlike blackmail,” a top executive at a major insurer who asked not to be named told InsuranceNewsNet. He said his company had to allocate millions of dollars to boost reserves and buy reinsurance at levels he felt were unreasonable or risk being downgraded by AM Best.

Best’s brand is so strong that not seeking a rating from the agency is bound to raise suspicions with lenders and customers, the executive said.

Lawsuit claimed 'flawed methods'

He is not alone in his feelings. The most notable case occurred this year when Atlantic Coast Life Insurance Company and Sentinel Security Life Insurance Company, both affiliates of insurance investor A-CAP, sued AM Best claiming the agency’s threat to reduce its ratings was “based on flawed methods, improper assumptions, and demonstrably false data.”

“It also inexplicably ignores material information that the A-CAP Insurers provided that refutes the basis for AM Best’s proposed downgrade,” according to the complaint. “Those errors violate the policies and procedures that AM Best told the world – and the A-CAP Insurers – it would follow.”

Recently, A-CAP and AM Best said they reached a settlement in the legal dispute but neither would comment on the details. Both insurers are still listed as “under review” with “negative implications” on Best’s web site.

“AM Best knows its conduct has fallen far short of its standards,” stated the lawsuit. “And it knows its threatened rating deviates substantially from its past practices. The A-CAP Insurers have repeatedly warned AM Best of the errors and deviations. But instead of fixing those errors and respecting its prior practices, AM Best has refused to meaningfully engage with the A-CAP Insurers.”

Best revised methodologies in 2017

For its part, Best agrees that it revised its methodologies in 2017 but believes the current calculations are more accurate and fairer. Previously, its capital model had one score. Since 2017, it uses several different points on a probability curve that, for P&C insurers, accounts for management of risks in 20, 100, 200, and up to 500-year probability.

“The farther out you hold capital, the stronger you are to absorb losses,” said an AM Best official. “The lower and lower probability losses mean you're financially stronger. So, if you can only hold or absorb a loss at the one-in-20-year return period, your balance sheet strength is considered weaker than if you were able to hold capital that could absorb losses at the one-in-250-year event.

But much more goes into the overall credit review, Best said, including operating performance, business profile, risk management, and an overall ability to pay claims.

Best will not comment specifically about the A-CAP case and apparent settlement but said its methodologies are often tested and reviewed and present a solid, objective, assessment of a company’s strength.

Nevertheless, there are still those who are unconvinced and say there is no other place they can go for a credit rating with the same imprimatur as AM Best. Moreover, having to reserve and buy reinsurance for a one-in-500-year event regardless of your location and history seems excessive, some executives say.

“Some insurance pros think AM Best is asking too much in making companies save for a super rare mega-disaster that only happens once every couple of centuries,” said Veronica Fernandez, founder, and independent broker for Secure Senior Benefits. “I agree that the bar is set really high, and it feels like AM Best is the only game in town when it comes to deciding who’s financially strong in our industry.”

Fernandez says requiring tough financial standards is not a bad thing but agrees there should be more conversation about how these ratings affect the industry.

'Sweet spot' of being creative and secure

“Are they keeping companies too cautious, holding them back from offering better prices or coming up with new products,” she asks. “As an industry, we need to find the sweet spot where companies can be both creative and secure. It’s a fine line between being safe and being stuck.”

Others agree.

In September, AM Best downgraded its rating on SILAC Insurance Co., of Salt Lake City, Utah, from good to fair, with a long-term negative outlook.

Dan Acker, the president of SILAC, says Best is unfairly judging his company. He says AM Best requires reinsurers to submit to ratings but some new companies or affiliates like his do not have enough business on its books to even warrant a rating.

“So as a result, we have two unrated reinsurers that are assumed to be highly risky, which is not the case,” Acker said. “They're both well-capitalized, very, very strong companies.“

The two companies (Hildene Capital and Heritage Insurance), Acker said, have been rated positively by another credit rating agency but he says those agencies do not carry the weight of an AM Best rating. He is hoping the disquiet about Best will lead to changes and provide opportunities for other agencies to build more business and reputation.

“It feels like this is going to have to drive some changes,” he said. “They're impacting stock values and costs. We obtained a rating from KBRA [Kroll Bond Rating], and we are in the process of obtaining a rating from Fitch. We have always only gone with Best but I’m sure a lot of us will broaden out to include others, which will help with recognition and reliance.”