An instant guide — Seven Simple Signs — of what to look for when assessing the financial strength of an insurance or reinsurance company.

1. Capital

Balance Sheet: Remember this is only a view at a point in time.
Gross Assets: These can be misleading. Always look for the net.
Shareholders Funds: These represent free assets = strength of the company (NB. they do not represent market value)
Technical Provisions: These are insurance funds i.e owed to the policyholders (NB. Look out for internal group R/I arrangements)

Preferred levels of capital & surplus: Insurer – £ 25 m / Reinsurer – £ 50m – £100m+

2. Profit & Loss Account

This is the technical account or revenue account.
Again the gross premium is not particularly relevant. Check the ratio of written : earned
(NB. If more than 50% reinsured, then look to security of the reinsurers).

3. Solvency Ratio

Check ratio of shareholders funds : premium
(If longtail business is being written this should be no less than 1 : 2.).
Where capital is low, request unconditional parental guarantee.
(NB. If privately owned, there may be difficulties in raising additional capital)

4. Management

Obtain information on their track record, previous companies etc.

5. Value of Assets

If the assets are very liquid then there is low volatility.
(NB. Watch out for too much property or inter–company balances)

6. Chairman's Report

Look out for expansionist "gems" i.e. where is the capital going to come from?

7. Auditor's Report

The auditor may have certain reservations or qualifications.

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