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Demotech Understands and Actively Supports Captives, RRGs and Specialty Insurers

The accuracy of the financial aspect of strength and stability ratings has rarely been more pertinent than in today's economic climate.  Demotech, Inc. is a financial analysis firm specializing in evaluating the financial stability of regional and specialty insurers.  Since 1985, Demotech has served the insurance industry by assigning accurate, reliable and proven Financial Stability Ratings® (FSRs) for Property & Casualty insurers and Title underwriters.  FSRs are a leading indicator of financial stability, providing an objective baseline of the anticipated future solvency of an insurer.  At a time when ratings are under increasing scrutiny, our unsurpassed record of accomplishment in the important area of long-term solvency provides an important edge to those that utilize FSRs.


In 1989, we became the first company to review and rate regional and specialty insurance companies, including captives.  Since then, we have assisted insurers whose property insurance policies were previously unacceptable to the secondary mortgage marketplace.


More recently, in January 2005, HUD designated Financial Stability Ratings® (FSRs) of A or better as evidence that a professional liability insurance company was acceptable under HUD's Section 223 (f) and Section 232 programs.  Virtually all mortgage lenders as well as an increasing number of umbrella insurance markets, insurance agents E&O carriers and premium finance companies rely upon and accept FSRs of A or better.

 

Evaluation Process for Specialty Carriers

The historical operating results of a relatively new captive insurance company may not be representative of its prospective financial stability.  To address this matter, Demotech utilizes an evaluation process that applies enterprise risk management principles and practices to the evaluation of the company.  We developed this process in 1989.


In these situations, our initial data and information request includes the following information:

 

 

We review this information in advance of on-site meetings.  During the on-site meetings, we discuss each of the major functional areas of operations:

 

 

Each component of our review is important.  About 30 days after our on-site meetings have concluded, a preliminary report is submitted for management's review and consideration.  Should the insurer concur with our evaluation, we finalize the report and issue an FSR.

 

Comparison of Long-Term Solvency

When we compared the 15 year history of our FSRs to the 15 year history of Best's ratings, as of June 30, 2010, the results were comparable, with Demotech FSRs having the superior record of long-term solvency.


Similarly in 2011, Florida State University's College of Business Risk Management and Insurance compared FSRs with ratings issued by A.M. Best, Standard and Poor's, Moody's and Fitch.  The study reviewed thousands of insurer ratings issued over a nine year period.  The results were released in A Comprehensive Examination of Insurer Financial Strength Ratings.  The study's conclusions included the following:

 

 

Our conservative review philosophy is demonstrated in our assignment of stable FSRs at the A level and above.  We believe that a focus on insurance fundamentals, including pricing, loss and loss adjustment expense reserve adequacy, liquidity and quality of invested assets, and appropriate utilization of reinsurance must be properly reflected.

 

Making the Effort to Understand

Captive insurers, specialty insurers and RRGs are created to respond to the insurance industry's failure to address the needs of segments of the market.  Captives, specialty insurers and RRGs are contrarians by their nature.  If the insurance industry provided effective solutions, alternative markets wouldn't even exist.  In our opinion, a review and analysis process based upon the procedures and practices utilized for traditional insurers must be adapted to specialty carriers.


Demotech, Inc. understands the unique structure and perspective that captives, risk retention groups and specialty insurers bring to the Property and Casualty industry.  In our working relationship with analysts as well as government entities and business associations, Demotech is often called upon for our expertise and perspective.


Today, more than at any time in recent history, insureds, agents and constituents need to have independent verification of financial stability.  Since Demotech's rating methodology is based upon a review and analysis of insurance fundamentals, focused specialists, such as captives, are not penalized for operating under restrictions or constraints that limit product line diversification.  In fact, they are recognized for the specialists that they are.

 

 

Benefits of Finalizing a Financial Stability Rating®

 

OTHER USEFUL INFORMATION

Definitions of Financial Stability Ratings®
P&C Insurer Review Process
Title Underwriter Review Process
Health Insurance Company Review Process
Self-Funded Entity Review Process
Serious About Solvency – Financial Stability Rating® Survival Rates 1989 through 2004PDF File
a 15-year retrospective review of the accuracy of FSRs
Financial Stability Rating® Notifications
Overview of Comparative Financial Observations (CFOs)
Frequently Asked Questions (FAQs)