About the BIBA Litmus Test Report (BLTR)

The background to the BLTR

BIBA members often consider the financial strength ratings of insurers carriers when making a recommendation on the use of a carrier to policyholders.

BIBA’s Standard & Poor’s ratings facility is free to BIBA members with fewer than 200 employees and allows them access  insurance credit ratings and research on UK-based insurance companies.

Ratings from the other major credit rating agencies such as A.M. Best, Fitch and Moody’s are usually available online and rated insurers should be able to confirm their rating.

However, not all insurers active in the UK non-life market are rated. Ratings from the above agencies have to be requested and  now must paid for by the rated carrier (or its parent group).

Ratings are of course only opinions – in effect forecasts. Like all forecasts they do not and will not always prove to be correct; however expertly researched. Nonetheless they provide brokers with a third party opinion they can reference when executing their duty of care to a client.

For an unrated carrier that opinion is missing. A broker might conclude that a carrier being regulated is sufficient due diligence, but the fact that ratings are so widely used implies that many market participants do not view that as the case and indeed regulators themselves tend not to imply that it is.

A full rating analysis of an insurer’s financial health is a complex process that generally involves quantitative assessment, business analysis and expert judgement. Capital analysis and historical performance play a key role, set in the context of other aspects of an insurer’s credit profile such as:

  • the market(s) in which it operates;
  • the strategic and tactical approach it takes to survive and succeed in a competitive world;
  • its risk appetite;
  • its role in any wider group and the credit profile of that group;
  • any threats it might face in the future; and
  • the quality and experience of the management and its risk management.

The Litmus Ratings Guide gives more information on non-life insurer ratings.

For many BIBA members, employing the expert internal analytical staff to conduct rating agency style insurer reviews is simply not feasible. Given this, realistically, the two main sources of insight on an unrated carrier for a broker would be the carrier’s audited accounts and the broker’s own knowledge of the carrier’s operations. Information to be published under the Solvency II regulations will  provide a useful perspective to brokers but is likely to also require considerable expertise to interpret.

That is why BIBA joined forces with specialist consultancy firm, Litmus Analysis Ltd (Litmus), to design a report that can facilitate a broker’s own reviews of unrated carriers. The Litmus Team includes analysts with decades of experience at S&P and A.M. Best.

The BIBA Litmus Test Report (the BLTR) includes considerable educational and explanatory material for users, in addition to ratio reports on the covered unrated insurers.

BLTR content, its purpose, and its intended use by members

For each insurer the BLTR features a set of key ratios selected by Litmus to support broker reviews of a carrier’s financial health. Many additional ratios could have been selected, but Litmus has limited the number to make the BLTR easier for brokers to use.

To facilitate an insurer review, each ratio outcome is benchmarked against a sample of 50 UK non-life carriers. Additional important metrics to be considered (size and growth) are also displayed.

The financial data used to calculate these areas is provided by Best. In addition to being a specialist insurance industry rating agency, Best is a global vendor of insurance company data which is widely used by – among others – the market security functions of major brokers. The data is sourced by Best from insurance company audited accounts.

In order to support the use and interpretation of the financial information shown, Litmus has also provided comprehensive educational and explanatory guides which are all critically important to the effective use of the BLTR. These guides include explanations of the ratio calculations and the analytical relevance of the concepts the ratios (and other content shown in each insurer’s entry) reflect. Crucially they also explain the key caveats and contextual issues that should be borne in mind when looking at this type of information.

It is not the purpose or intent of the BLTR service to apply any interpretation to the ratio outcomes; this is specifically the responsibility of the broker using the test.

It is very important for members to note that the BLTR merely supports a review of an insurer’s audited accounts and or other materials available on the insurer, and or a member’s discussions with the insurer. The BLTR is not a substitute for this level of review.

While the analysis of an insurer’s financial profile is a specialist subject, Litmus has designed the supporting materials to take non-analysts through the key points in a way that should be comprehensible for a financial professional. In addition, BIBA (working with Litmus and A.M. Best respectively) is available to help members with questions they may have.

The BLTR is not offering any form of opinion on an insurer; the information on the insurers covered  is merely factual (in that it is derived from the insurer’s audited accounts). Members will need to consider their own conclusions  as a result of its insurer review.

Access to the BLTR

Any BIBA member may access the BLTR but only after confirming that they have read and understood the educational and explanatory materials. If the member shares any details on the BLTR entry on a carrier shown within the BLTR with colleagues, it is their responsibility to ensure that those colleagues are fully aware of the supporting materials.

The BLTR is provided on a strictly private and confidential basis. External distribution (i.e. outside of the member firm) is prohibited as are references to its content either written or verbal.

The roles of BIBA, Litmus and A.M. Best (Best) in BLTR production and member support

BIBA is the provider of the BLTR and has commissioned Litmus and Best to provide analytic and data services respectively.

BIBA selects the insurers that are covered by the BLTR. Litmus reviews each insurer to check the BLTR is applicable to the insurer’s business profile, e.g. that it is  a non-life insurer and  that its data is sufficiently complete within Best’s database etc.

BIBA will also act as the first line of support for analysis or data questions that they may then subsequently pass on to Litmus or Best.

Litmus is the analytical consultant to BIBA supporting development and production of the BLTR.

Litmus has designed the content and format of the insurer entries to reflect widely used and accepted credit analytic financial metrics for non-life insurers.

Litmus calculates the ratios and benchmarks shown in the BLTR from data provided by Best. Litmus also provides the educational and informational support information shown in the BLTR.

Litmus provides support on analytical questions from members passed on to it by BIBA. Litmus does not support questions on the underlying data from Best.

Best is the data vendor to BIBA, providing the data from which Litmus calculates the ratios and benchmarks.

Best provides support on questions from members passed on to it by BIBA on the underlying data used in the BLTR. Best does not support questions on the analytic, educational or informational content provided by Litmus.

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