Chicken and egg: rating startup reinsurers

A rating remains a critical component for any startup looking to write non-collateralised reinsurance business. While all the rating agencies will rate startups, their differing criteria can make a big difference to what rating can ultimately be secured, says Stuart Shipperlee, head of analytics at Litmus Analysis.

The key role ratings play in many re/insurance markets leads to a ‘chicken and egg’ issue when it comes to startup re/insurer ratings.

For ‘traditional’ (non-collateralised) re/insurance, having a rating from the start of operations can be critical. However, since ratings criteria heavily reflect expected operating performance (and related issues such as competitive position) this begs the question as to how this is analysed, given there is no track record to extrapolate from.

The agencies address this via a combination of factors. While different agencies have differing degrees of emphasis, all will consider the following five things:

Inevitably there will be a substantial extra degree of conservatism in the rating relative to a well-established business.

For ‘traditional’ reinsurers, having an AM Best or S&P rating can be particularly important at launch.

A widely held market myth is that S&P does not actually rate startups; this is not true. However, the greater degree of emphasis AM Best appears to give to ‘redundant’ capital (more capital than is required for the rating level) through the plan period means that achieving the A- level can be a more practical option than from other agencies if all the other important factors are sufficiently strong.

That is, if market conditions are favourable enough, investors can be prepared to provide that excess capital to the reinsurer to achieve the rating.

Conversely, S&P’s perceived greater emphasis on track record and market position as a core indicator of prospective performance is obviously hard to address for a true startup. This greatly increases the chance of an S&P rating at launch being in the BBB range, even where capital and business plans seem robust and the reinsurer’s leadership have strong personal track records.

An obvious potential exception to this is where the ‘startup’ is in practice the ‘spin-out’ of an existing book of business.
From a rating agency point of view, the distinction between an A- and, say, a BBB is nothing like as profound as how the reinsurance market treats it. Both rating levels are deemed “secure” (equivalent to “investment grade on bond ratings”).

In “ratings land” the really key distinction is between BBB- and BB+.
But, in the reinsurance world, a slip from A- to BBB+ can create a major challenge to accessing business, even if the hurdle wasn’t set by the agencies.

So, it’s not true that only AM Best will rate startups. Rather it’s the case that their approach allows for the potential to achieve an A- if the profile is strong enough, whereas the other agencies’ startup rating criteria make anything above BBB+ unlikely (even though it is still a “secure” range rating).