29 December 2009—Fitch Ratings, a renowned global ratings agency, updated its ratings criteria for insurers.

Where sufficiency of information permits, Fitch provides multiple ratings (of slightly differing foci) for each insurer it evaluates: Long-term IDR (issuer default rating), Short-term IDR, Long-term IFS (insurer financial strength), Short-term IFS, to name a few.  Ultimately, each is derived from an assessment of the insuring organization’s resilience against the risks which face it, chiefly: product risk, reserve risk, and asset risk.

The foremost of the documents which publicly describe Fitch’s current ratings criteria declares that “ratings are primarily based on a review of public information together with Fitch’s judgments and forecasts.”  And that is perhaps the most substantial portrait of their criteria to be gleaned from the entire document.  The complexity of financial industries, in addition to the imperfect comparability of one insurer to the next, obliged Fitch to treat rated organizations with individual attention; that puts much weight onto the discretion of the committee performing the evaluation and lends a great deal of vagueness to the document.  Indeed, a company poring over the public documents could have no hope of arriving at a Fitch-rating for itself.

The indefinite character of its criteria aside, insurers would do well to lay importance by Fitch’s work because the ratings which Fitch and other reputable ratings agencies provide impact the market for their products.  Certainly the customers’ confidence, requisite for the sale of any product, is influenced by third-party ratings, but Fitch points out that the insurance industry is especially affected by them because the market value of an insurance product is tied to the perceived strength of the insurer, even after the sale of the product.  Insurance is furthermore distinguished from other industries in the financial sector, Fitch says, because the government is unlikely to consider insurance a vital industry; so, unlike banks, insurers had better not count on a bailout at taxpayer expense.

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