The Importance of Insurer Financial Strength and Size

By Simon Fenn
In March 18, 2016
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In 2000 Reliance Insurance Company was the insurer behind the CRCA Insurance programme.  In June 2000 Reliance Insurance Company stopped writing insurance business and in October 2001 went into liquidation.  The Insurance Journal headlines read:

Reliance Insurance Company 1817 – 2001 R.I.P.

Such has been the demise of many insurers but this in particular was the catalyst that started the slippery slope resulting in the discontinuation of the CRCA insurance programme.  Today many mechanisms are in place to ensure the financial stability of Insurers; nonetheless, just like in roofing even if everything is practiced correctly, things still go wrong and insurers still fail.  As a result of insurer financial failures the financial strength and size of an insurer has become very important to owners of construction projects.  Contractors need to be mindful of the financial stability of their insurers, not only to keep their insurance in place but also because it is very important to many of their customers.

Property and Casualty Insurance Compensation Corporation (PACICC)

PACICC (www.pacicc.ca) protects the insurance buyer to a limited extent when its insurer fails financially but keep in mind that the protection has a $250,000 each occurrence limitation and there could be many in line looking for claims to be attended to.  When millions of dollars of exposure exist, $250,000 does not go very far at all. Furthermore, the time, expense and general inconvenience of having to re-arrange insurance unexpectedly after insurer failure can be very disruptive on a business and its client relationships.  In these times, if you have a choice of a financially strong insurer with the financial size and capacity to sustain large losses and remain in business, why consider anything less?

The Project Owner and Your Insurer

It is not uncommon today to see an insurance specification in a construction contract that not only requires the contractor’s insurer to be licensed in the jurisdiction of the work, but also, that the owner reserves the right to reject any insurance it deems unacceptable for financial reasons or otherwise.  Some owners will go so far in contract specifications as to require a specific minimum financial rating such as A. M Best Company Financial Strength Rating of A-.  It is advisable that most contractors, in particular those working for large sophisticated owners, ensure that they place their insurance with an A. M. Best A – rated insurer or better.  This article does not suggest that an insurer that chooses not to be rated by a leading rating agency such as A. M. Best or Standard & Poor stands a greater chance of failing, but let’s face it, no Owner is going to spend its time conducting its own financial assessment of an unrated insurer.

Without a doubt, there is a greater chance that contractors that place their insurance with insurers that are rated below A.M. Best A- or have no rating at all, run the risk of loss of project due to unacceptable insurance:  Caveat Emptor!

M. Best Company

A.M. Best Company is one of the most popular resources for financial strength of insurers.  A. M. Best Company monitors the financial strength of insurers and provides a rating system to help the public understand the financial strength (FSR) and size (FSC) of insurers.  When selecting an Insurer the adage “bigger is better” really does apply.  Incidentally OIRCA members that participate in the OIRCA Liability Insurance programme with Underwriters at Lloyd’s, London benefit from an FSR of A (Excellent)

and an FSC of $2 Billion or greater.  To check the A.M. Best Rating of your own Insurer please visit www.ambest.com.

OIRCA members work on the very largest roof surfaces in Ontario on behalf of some of the largest and most sophisticated Owners.  A. M. Best states:

“Many insurance buyers only want to consider buying insurance coverage from companies that they believe have sufficient financial capacity to provide the necessary policy limits to insure their risks.”     

The same applies in construction when an owner is depending on a contractor to supply acceptable insurance, the owner wants to be reassured that the contractor is using a financially strong insurer. With insurance claims reaching world record levels; investments being less than dependable for insurers and world economies struggling financially, a strong financially rated insurer will give a project owner far greater confidence than insurers with no rating or an unacceptable rating.

With financial information being publicly available to the insurance buyer at the push of a button today, anyone can reduce the likelihood of their insurer running into financial difficulty.  If one buys insurance to transfer risk, why assume another risk of project rejection or insurer failure, by placing your coverage with a less than A. M. Best A- Rated Insurer of minimal financial size?

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