Rating Triggers

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Posted on 15 Sep 04

Editors note: A recent newsletter from Chris Burand contained excerpts from an article in Insurance Day on the topic of rating triggers.

RATING triggers in reinsurance contracts have left a number of reinsurers at the edge of a "rating trigger cliff" according to a report by rating agency Fitch.

Insurance analyst Chris Waterman said the issue of financial security remained paramount for cedants and so the use of rating triggers was leaving a number of smaller players balancing on the edge of a precipice.

He said the market was currently beset by contradictions with strong underwriting results countered by signs that rates are beginning to soften.

Mr Waterman said that importance placed on security by cedants made rating triggers a danger for the reinsurance market. Rating triggers allow cedants to either scrap the contract and demand their premium back or demand the reinsurer put up some collateral to show they would be able to meet their commitments, if their rating falls below an agreed level.

"What tends to happen in cases where a downgrade triggers a clause is the former rather then the latter option," explained Mr Waterman. "It does leave some reinsurers on the edge of a cliff in terms of their ratings. A downgrade can suddenly see a large amount of coverage cancelled and it leaves the reinsurer with a potentially serious situation.

"Our research has shown that between one third and one half of reinsurance contracts will have triggers placed in the clauses.

"There are some reinsurers who are able to negotiate their way to a point where the trigger is removed and there are also those reinsurers who have a rating level which means that such a trigger is so far off their current rating that it is of no concern. I think what it does show is that cedants are taking the financial security of their partners ever more seriously."

Fitch said the talk of underwriting discipline was not indicative of any impact by underwriters on the cycle.

Fitch said the market was still deciding whether it felt the glass was currently half-full or half-empty and its stable outlook was driven by a belief that the number of upgrades and downgrades over the next 18 months to two years would be evenly matched.

"We would also call on our clients to review the individual ratings of the respective companies alongside the market-wide ratings and outlooks," said Mr Waterman.