Financial analysis firm Demotech has encouraged property re/insurers to re-think their choice of rating agency, on the basis that many agencies take a “short-sighted,” quarterly earnings perspectives.
For instance, it is prudent for property insurers with exposure to catastrophe to spend heavily on reinsurance to secure appropriate levels of vertical and horizontal coverage over the course of a season, Demotech notes.
But the firm says other rating agencies have a tendency to view this important expenditure negatively and characterize it as a dependency on reinsurance.
This was a particularly important consideration in 2020, when property insurers were impacted by COVID-19, business interruption litigation, riots, severe convective storms, the record number of named storms in the US, wildfires, and increases in the cost of catastrophe reinsurance.
“In 2020, with the number of named storms in addition to other events, property insurers honored commitments to policyholders by addressing the claims that emanated from the named storms and events in addition to attritional claims,” said Joseph L. Petrelli, President and co-founder of Demotech, Inc.
“Rather than applaud these insurers for having reinsurance programs that facilitated their ability to pay claims and simultaneously protect their financial stability, other rating agencies seemed to be surprised that insurers could not earn an operating profit while addressing the undue number of claims emerging from the catastrophe events,” Petrelli continued.