Errors and Omission Insurance

[Dale M Krause]

I have heard that writing an insurance company rated less than A by A.M. Best can lead to issues for agents. I'm trying to understand the problems. Is the issue limited to products like multiyear guaranteed annuities? Do E&O carriers exclude coverage for lesser-rated insurance company products? How does Demotech fit into the rating companies? How do the B+-rated insurance companies survive?

 

[DHK]

You're talking about the insolvency coverage for any claims against you for selling various companies with lower ratings.

NAPA E&O says this:

• Insolvency coverage on products sold from A.M. Best rated "A-" or better admitted carriers at time of sale

Carriers will not cover you for claims against you for company insolvency if the company was rated below A- from A.M. Best at time of sale.

Time of sale is the key part. You can only do the best you can at the time when you take the app and when it's delivered.

If you're looking to sell a lower rated company and want coverage against you for insolvency of the company, you'll want NAILBA's E&O.

[EXTERNAL LINK] - NAILBA E&O

Does the policy cover business placed with a carrier rated less than A? Is insolvency covered?

​

This policy covers errors and/or omissions made by the Agent, regardless of the carrier rating however if a claim arises from insolvency, the claim would not be covered under this policy unless it was rated an B+ or higher at the time the policy was written.

 

[Tahoe Ray]

I have heard that writing an insurance company rated less than A by A.M. Best can lead to issues for agents. I'm trying to understand the problems. Is the issue limited to products like multiyear guaranteed annuities? Do E&O carriers exclude coverage for lesser-rated insurance company products? How does Demotech fit into the rating companies? How do the B+-rated insurance companies survive?

Why do people buy junk bonds? Why do people buy penny stocks?

They want return.

The same reason someone would be willing to buy a B+ rated annuity carrier (or life carrier who is cheaper or whatever).

Some agents only look at "best rate/cost" so it's easy for those companies to stay in business.

A lot of companies work their way from "B rated" into "A rated" and that's a credit to their management/investment/distribution strategies.

Personally, I prefer to wait until they get there before I'm willing to risk my clients' money.

That and like @DHK said, E&O.

 

[scagnt83]

They survive because most agents are not aware the carrier is not covered by their E&O.

Or, the agent does not care, because the B rated carriers offer the highest rates and returns. (because they have to, just like Bonds)

 

[scagnt83]

I do believe their are some E&O carriers that will cover a B++ carrier.

 

[Al3x Lee]

I have heard that writing an insurance company rated less than A by A.M. Best can lead to issues for agents. I'm trying to understand the problems. Is the issue limited to products like multiyear guaranteed annuities?

On the P&C side of insurance, a super common issue with a lower rated carrier is contracts. Go read a lease or other contract, it will usually specify that insurers providing contract coverage requirements need to be A- or better and maintain a certain financial capacity (XV for example)

How does Demotech fit into the rating companies?

AM Best and Demotech serve different segments of the insurance market and use distinct methodologies. AM Best is much older, started in the 1800s and focuses on the global insurance industry, providing ratings from A++ (Superior) to D (Poor) based on financial health, risk management, and market conditions. AM Best is the gold standard as its ratings are often required by regulators, reinsurers, and large policyholders. In contrast, Demotech, established in the 1980s, specializes in rating regional and specialty insurers, particularly in the U.S. Demotech's ratings range from A (Exceptional) to L (Licensed) and focus on financial stability, management practices, and strategic plans. While AM Best has a broader, global reach and is influential across various insurance sectors, Demotech serves niche markets, such as the Florida property insurance market, where it rates smaller, newer insurers that might not be covered by larger agencies.

How do the B+-rated insurance companies survive?

Fronting is one way to do it. An insurance company (the fronting carrier) issues policies on behalf of another insurer (the lesser rated carrier, which becomes the reinsurer). The fronting carrier typically has a stronger financial rating, such as AMBest A or A+

The higher-rated insurer (The fronting company) issues the insurance policies on it's paper. The lower-rated insurer reinsures the policies. The lower rated carrier assumes most of the risk and responsibility for paying claims, while paying a ceding fee to the fronting carrier for use of their superior rated paper.

B-rated insurers might also focus on specialized or niche markets where there is less competition from higher-rated companies.

They can also often offer competitive pricing to attract customers who are price-sensitive. Lower premiums can be appealing to individuals or businesses looking to save on insurance costs, especially if a fronting carrier is involved.

 

[marindependent]

I do believe their are some E&O carriers that will cover a B++ carrier.

Oh NO

What should we do when insureds want to buy CEA policies?

"AM Best has downgraded the Financial Strength Rating (FSR) to B++ (Good) from A- (Excellent) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb+” (Good) from “a-” (Excellent) of California Earthquake Authority (CEA) (Sacramento, CA)." Source.

Put my hands over my ears [AKA earmuffs] to pretend I did not hear the request? Lie and say they dont offer earthquake policies in California any more... Or have clients sign an E&O Waiver????