Thanks to a high level of regulation and a tariff system, German direct insurance business had little interest in ratings until the transformation of the market when the third European insurance directives came into effect in 1994. ASSEKURATA, based in Cologne, was set up to provide an independent rating agency service to fill the gap, as Dr Gerd Weidenfeld and Karin van den Berg explain.

The extent of insurance company ratings show different stages of development in the national markets, mainly as a result of historical differences. The longest record in rating can be found in the barely regulated insurance markets of the United States and Great Britain.

For over a century the A. M. Best Company has provided reports about the financial situation of US insurance undertakings. Considering the comparatively high amount of bankruptcies in the US and Great Britain, anglo-american ratings concentrate on the claims paying ability of insurance companies. Consequently, they focus on pure solvency ratings.

On the other hand in Germany, there was so little competition that even middle sized insurers did not need to worry about their existence. Differences in quality between the various insurance undertakings were hardly noticeable. With the changes of 1994, this was no longer valid. Through the removal of supervisory restrictions, price and product competition became possible for insurers. In addition, service to the customer developed as an important component of competition.

As competition grows stronger, prices decrease, new products are designed and more service is required, so differences in quality between the insurance companies widen. At the same time, the risk of wrong entrepreneurial decisions grows. Against this background, the need for well-founded and reliable information about the quality of the different insurers becomes stronger.

Initially, after the market was liberalised as a result of the European directives being implemented, a government testing body and various financial and economic publications attempted to rate insurers, particularly health insurers because of the long term nature of the contracts. However, these ratings relied on published information and were not sophisticated. Therefore, the time is now right for an independent rating in Germany. The insurance industry is not in the position to decide whether this will happen or not. Ratings will be established and they will become obligatory for insurers.

As the founders of Germany's first rating agency, ASSEKURATA, we follow this very principle. Our rating is the result of quality judgement made by independent experts who based their assumptions on scientific principles. It contains more than just a standardised ratio analysis. We review all of the aspects of insurance undertakings that are important for the policyholder.

These are:

* Service. (What service does the insurer provide to its customers?)

* Security. (How safe are the customers' claims?)

* Profit. (How successful is the insurer?)

* Growth. (How attractive is the insurer for the customer?)

In addition, we look at:

* Profit sharing (in life insurance) and the

* Contribution stability (in health insurance).

The ratings of these partial qualities are then aggregated to a final result. However, deficient results in security and service cannot be offset by good results in other aspects. Both the partial and the complete rating are published, so that the customer gets detailed information about the qualities of the organisation.

ASSEKURATA differentiates its rating by 11 different grades, from A++ for excellent to D for deficient. Companies rated A++ to B- are considered reliable, those rated C+ to C- will be specially observed. Of the 12 companies so far rated, none has fallen below B.

The rating is based on the following principles:

* Voluntariness.

Insurance undertakings are rated on their own free will.

* Payment.

The production of the rating has to be paid by the insurer. The cost is dependent on the complexity and structure of the undertaking.

* Willingness to provide internal information.

The rating is based on internal information. If the insurer is not willing to provide this information, no rating is possible.

* Strict confidentiality.

Internal information given to ASSEKURATA is treated with utmost confidence.

* Publication after release.

The rating will be published only if the insurer agrees, otherwise we maintain confidentiality about the proceedings and the result.

* Regular update.

The rating can be used for one year after completion. For further use, an update is compulsory.

The company itself commissions a rating. Therefore, it agrees to give us all the required information, such as extensive internal accounting data. Furthermore, we hold comprehensive interviews with the corporate management in order to find out about future corporate potential. A unique feature of our rating is that we contract a professional marketing research institute to interview a representative sample of customers to get their views concerning the insurer's service. On the other hand, the insurer gets useful information concerning improvement.

With this information, collected through the management and customer interviews, and through the internal accounting, the experts of the rating-committee rate the insurer's qualities. We lay strong emphasis on the fact that our rating is not only the result of a mechanical calculation process. The results of the statistical-technical processing are always qualified through information "behind the figures".

For the customer this rating means a quality certification. If one wants to deal with an insurer, it is possible to rely on this classification. Besides that, the public gets information about the insurer's financial situation, which is sometimes hard to access without knowledge of the market. We believe that as customers come to accept the ASSEKURATA rating as guidance, it could result in competition among insurers by quality and they would have to improve their services. Through the information given by ASSEKURATA, rated insurance undertakings get clues and tips where they have internal deficits or competitive disadvantages. In addition, good or very good results can certainly be used as marketing instruments.

Before a company's rating is published, the results are presented to the managing board, which then decides whether the company should first work to improve some items or publish directly.

Different forms

Different forms for the presentation and publication of the rating are issued, according to the different recipients and media.

* Of primary importance is the extensive management report which is exclusively for the corporate management of the company concerned. Here all results of the rating are explained in detail, so that the insurer is clear about the judgements. This report is the base upon which the insurer decides about publication. If the decision is positive, two more reports are issued:

* The rating report, written for expert readers such as brokers and the trade press, gives an insight into the reasons that led to the rating result. The report makes the rating understandable, though the insurer's internal material is, of course, not included.

* Finally, the brief summary. The partial results and the final rating are named. Furthermore, useful information about structural features, such as distributive channels, regional limitation and the approached customer groups is covered. The summary is meant to be short, precise information for those readers who are more interested in the result than an explanation of the rating.

Meanwhile, we have produced a special rating logo to reveal at first sight to the potential customer that the insurer is commendable. For the insurance companies the logo is a helpful marketing item.

Reception from the market is very positive and encouraging. About one year since its start, ASSEKURATA has already rated 12 insurance undertakings, and we are receiving inquiries from other companies.

Dr Gerd Weidenfeld is a senior analyst and Karin van den Berg a researcher with ASSEKURATA, Cologne. Tel: (49) 221 923 2306; fax: (49) 221 23 23 08.