Forty-five risk retention groups–17.5 percent of the total–hold ratings assigned by one of two rating agencies, either A.M. Best Company or Demotech Inc.
While RRGs don't require ratings, many choose to get one, because they must compete in the marketplace with other insurers. Some insureds, such as physicians and hospitals, need rated paper.
Best's ratings ("A-double-plus" to "F"), which are assigned to RRGs that subscribe to its interactive rating service, represent an opinion based on a comprehensive quantitative and qualitative evaluation of an RRG's balance sheet strength, operating performance and business profile.
Demotech's "Financial Stability Ratings," known as FSRs, are also assigned to RRGs subscribing to its service, based on a series of quantitative ratios and considerations that together comprise its "Financial Stability Analysis Model."
RRGs rated by Best operate in seven business areas, while those rated by Demotech operate in four. All of the RRGs rated by Demotech have been assigned "A" FSRs, while the ratings assigned by Best range from "A (Excellent)" to "B-plus (Very Good)."
When A.M. Best rates RRGs, it uses a process that looks at four key components that comprise the analysis upon which the rating is based–risk-adjusted capital, operating performance, market profile and assessment of management. Each factor is considered by A.M. Best in forming its opinion, which is "not a quality rating" but rather a "measure of potential impairment."
While the rating process for RRGs and commercial insurers is the same, A.M. Best does take into account the unique structure of RRGs in assigning the rating.
Karen Cutts is editor and publisher of the "Risk Retention Reporter" in Pasadena, Calif. Visit www.rrr.com for information on risk retention groups and purchasing groups.
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