Business

Friday April 3, 2009

Ratings for insurers

By DALJIT DHESI


It will promote transparency and enhance consumer confidence

PETALING JAYA: It is timely and increasingly important for insurance companies to be rated to further promote market transparency.

Malaysian Rating Corp Bhd (MARC) senior vice-president and head of business development Roza Shahnaz Omar said given the current economic challenges, insurers needed to be rated as this allowed for independent assessment of their ability in meeting obligations to policyholders.

“In short, ratings will reflect the financial strength of insurers,” she added.

She said while most banks in Malaysia were rated to provide comfort to their depositors, most insurers in Malaysia were not rated.

Expressing similar views, RAM Rating Services Bhd head of financial institutions ratings Promod Dass said: “Ratings promote market transparency. Many corporates and banks in Malaysia, and their counterparts in other countries, are rated. It would be a good move for insurance companies to also obtain ratings.

“Insurance ratings are typically referred to as claims-paying ability (CPA), which reflect the current overall capacity of an insurer to meet its financial obligations to policyholders.”

According to Dass, being rated will also help in an insurer’s fund-raising exercise, especially when tapping the bond market.

Both local and foreign insurers operating in Malaysia should be rated although the parent companies of some foreign insurers were already rated internationally, Roza noted.

Being rated would enhance consumer confidence in the insurance companies’ stability as well as boost the insurer’s credibility with reinsurers, she said.

MARC currently rates the insurance arms of MNRB Holdings Bhd and Hong Leong Financial Group.

Dass said insurance ratings were voluntary. RAM had assessed insurance companies as part of its ratings of financial institutions but did not presently have any published insurance ratings, he added.

On how ratings on insurers should be carried out, Dass added: “Insurance companies can use the CPA ratings as a means to profile and keep policyholders assured about the companies’ relative fundamental position compared with their competitors.

“A CPA rating typically will look into, among others, the industry risks, competitive position, management and corporate strategy, underwriting performance, liquidity and investment portfolio quality.”

Roza said apart from considering macro-economic factors, MARC’s rating method also includes quantitative financial analyses and qualitative assessments based on discussions with senior management.

The insurance financial strength rating also used the same scale and symbols used by MARC for its national ratings of long-term debt obligations and issuers, she said.

These rating definitions, however, only reflected the unique aspects of the insurers’ financial strength within the industry context, she added.

Ratings symbols used by MARC include those in the secure range like AAA, AA, A and BBB, and those in the vulnerable range like BB, B, C and D.

For example, insurance companies rated AAA have exceptionally strong financial security characteristics and are most unlikely to be affected by adverse changes in economic and underwriting conditions.

Meanwhile, those rated BB showed some weaknesses in their operating profile and/or financial conditions, Roza said.

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