Insurers: Seeking Redemption Via Credit Ratings

Nigerian insurers and their counterparts in Africa are seeking to recover lost market share from their Western counterparts by meeting recommended standard practices. Ebere Nwoji writes that credit ratings is at the heart of their crusade

One of the issues currently giving serious  concern to insurers in Nigeria and across the African insurance market is how to use credit rating to develop and reposition themselves for global competitiveness.

This has been a serious concern because the insurers have continued to loose substantial part of their market share to their counterparts in the Western markets  in reinsurance, brokerage and in underwriting  big ticket accounts.

The Nigerian insurers are as  worried as  other insurers across Africa; so they have agreed to seek credit rating of the Western rating agencies.

In seeking for the credit ratings, their aspiration is to be rated by renowned rating agencies like the Fitch, Moody’s, Standard&Poor’s, and  of recent AmBest.

In their view,  positive endorsement by any of the aforementioned rating agencies to a large  extent determines their acceptance for business deals by owners of big ticket business,  especially in some hi tech businesses  and their competitiveness in the global market arena.

This explains why at the recent West African Insurance Companies Education Conference (WAICA) held in Lagos, discussions on how the regional insurers can use rating reports to secure the confidence of owners of big ticket accounts like those of aviation industry, oil and gas and construction contracts took centre stage.

The insurers lamented that value of African currencies continues to depreciate because most African countries consume a lot of foreign goods.

They cited example of what happens in insurance market, regretting that while big ticket businesses freely find their ways in overseas market,  even the crumbs that fall under the table of Western insurers which African underwriters pick up still find their ways indirectly to the Western market because owners of such business would  prefer reinsurance backing from global players like Lloyd’s  of London, Munich Reinsurance, SwissRe,Aon among others, before they can give the business to indigenous insurers.

Credit rating choices

The insurers lamented that one of the features these big business owners look out for is credit rating status of companies they want to give their businesses to. This has prompted insurers in Nigeria to strive to meet rating agencies for certification, recommendation and commendations.

But at the WAICA conference, the African insurers lamented that though rating by world renowned credit rating  agencies is fast becoming a parameter for choosing who to give out big businesses to, exorbitant charges, unfair and biased rating of African firms calls to question thier motive.

Chief Finance Officer, Unique Insurance Company Limited, Accra-North, Ghana, Mohammed Adamu, who spoke to THISDAY at the conference, said; “What we are all crying about is the unfairness of the rating agencies; whether they have been able to rate us fairly without any biases. It  all boils down to the need for Africans to produce our own home grown solutions, even our own rating agencies. We don’t need anybody out there to endorse us, which comes with their own biases because if they don’t rate us low we won’t go back to their own companies and that is what they use to grow their own economies. So they do these things with their own undertone.We should try to internalise our problems.I had expected this conference to say that we are gathering momentum to find our own rating agencies within the subregion to be able to rate ourselves.”

Experts’ Opinion

But a management staff of FMDQ and a chartered Accountant,  Mr Ebenezer Nwakamma said that Nigerian or even regional insurers need not bother about being rated  by global rating agencies, except if they were going global in their business outlook.

Their business and customers, he argued, come from within the region, adding that, “there were approved regional rating agencies whose report was  trusted and recommended by regulators like Security and Exchange Commission (SEC).”

He mentioned such home grown rating agency as Augusta and co, Data Pro who were approved by SEC, NAICOM among other regulators.

He questioned why Nigerian insurers should be aspiring to be rated by Fitch or Standard &Poors when they are not undertaking global investment exploration like Euro bond.

Insurance buyers, he said, need  not use the rating of local firms by the global agencies  as benchmark for their patronage, “after all, there were global firms these world renowned  credit rating agencies rated highly but they collapsed after few years of that high rating.”

He also noted that in accounting, which is one of the instruments used in rating, what professionals use is historical records which could not  tell the present state of an organisation.

Nwakamma cited a typical example of a company in Nigeria rated highly but which collapsed after a short while, saying that Consolidated Discount House was rated AAA for three consecutive years but that shortly after, the CBN withdrew its license and it collapsed.

He remarked that rating is good but not the best indicator of a healthy company to some extent, adding that, “this was  why some reputable rating agencies would  rate a company and keep close monitoring of the company and once they see any act of failure they would withdraw their rating.”

He explained that the reason  banks like Access, UBA, Ecobank  and Stanbic  IBTC were going for the global rating was because they were going to get Eurobonds. “So they needed it. But that insurance firms need not waste their hard earned resource in paying charges of global rating agencies, “he said.

Underwriters’ assessment

Speaking, former  Chairman, Nigeria Insurers Association (NIA) and Managing Director Cornerstone Insurance, Mr Ganiyu Musa, said the fulcrum of insurance rating from the perspective of the buyers is promise keeping.

According to him, insurance sells promise and the whole value of insurance resides on promise to pay potentially large benefit at the occurrence of future negatives.

He said this was  because a lot was  agitating the minds of insurance buyers regarding the ability and willingness of the insurance firm to pay. He said this had thrown up questions like, “Will they have enough assets? Will the firm continue to retain the assets?”

He said  since an average consumer did not have answers to these questions, potential clients would not be assured of the reliability of cash flow in an insurance firm and its continuity as an ongoing concern will be deemed healthy enough to discharge its responsibility to the public. He said this was  why rating has come up and has assumed much dimension in the present day insurance contract, describing the raters   as professional evaluators who come up with their opinions as to answers to the questions agitating the minds of the consumers. He said they use factors that other stakeholders were interested in, noting that that was why from the point of view of consumers, “rating was  good in the sense that it was deeper in fact finding of an ongoing concern than mere auditing and had credibility that goes with independence.”

Credit rating agency

A Director in one of the global rating agencies that specialised in insurance rating and Director Analysts AMBest, noted that currently there were  more than 20 rated companies in Africa.

He said each time AMBest goes through a rating circle, the result must show where the managers of the company could  improve their businesses, remarking that rating help  firms create process, benchmark its operations against any other investment in the world.

He said business managers needed to do comprehensive appraisal of opportunities in the market and that rating exercise had remained  veritable source to seek continuous improvement for business.

Insurance expert, Denise Finley said, “Credit ratings provide retail and institutional investors with information that assists them in determining whether issuers of bonds and other debt instruments and fixed-income securities would be able to meet their obligations.

He said when they issue letter grades, credit rating agencies (CRAs) provide objective analyses and independent assessments of companies and countries that issue such securities. 

He said: “Credit rating agencies provide investors with information about whether bond and debt instrument issuers can meet their obligations. Agencies also provide information about countries’ sovereign debt. The global credit rating industry is highly concentrated, with three agencies: Moody’s, Standard & Poor’s, and Fitch.

“CRAs are regulated at several different levels—the Credit Rating Agency Reform Act of 2006 regulates their internal processes, record-keeping, and business practices.

The agencies came under heavy scrutiny and regulatory pressure because of the role they played in the financial crisis and Great Recession”.

Aside rating companies, Finley said countries could be rated by   issuing  sovereign credit ratings. He said the rating analyses the general credit worthiness of a country or foreign government. “Sovereign credit ratings take the overall economic conditions of a country into account, including the volume of foreign, public and private investment, capital market transparency, and foreign currency reserves. Sovereign ratings also assess political conditions such as overall political stability and the level of economic stability a country will maintain during times of political transition. Institutional investors rely on sovereign ratings to qualify and quantify the general investment atmosphere of a particular country. The sovereign rating is often the prerequisite information institutional investors use to determine if they will further consider specific companies, industries, and classes of securities issued in a specific country.

“Credit ratings, debt ratings, or bond ratings are issued to individual companies and to specific classes of individual securities such as preferred stock, corporate bonds, and various classes of government bonds. Ratings can be assigned separately to both short-term and long-term obligations. Long-term ratings analyse and assess a company’s ability to meet its responsibilities with respect to all of its securities issued. Short-term ratings focus on the specific securities’ ability to perform, given the company’s current financial condition and general industry performance conditions.”