Insurers that dispute claims payments on financial guarantee contracts - even in fraudulent cases - could now have their counterparty credit, insurer financial strength and debt ratings lowered as a result, according to Standard & Poor's (S&P).
Previously investors and intermediaries involved in transactions could look at the insurer financial enhancement rating (FER) for an indication of whether an insurer would pay claims quickly. However, FER criteria have changed, and this in turn is affecting other S&P ratings.
S&P spokesman Bob Mebus said: "As part of a series of revisions to our rating criteria for financial guarantee insurers, the selective default applied to the FERs of insurers that do not meet their commitments has been extended so that the insurer would also be reviewed for a likely lowering of its counterparty credit, insurer financial strength, and debt ratings."
Mebus explained that to be assigned an FER an insurer must now state in writing that claims arising from an insurance policy used as credit substitution in a structured transaction will be paid immediately, regardless of any legal or commercial disputes.
"Any insurer that breaks this agreement is likely to impair its credibility in the capital markets and, consequently, its market position, financial flexibility, and even its ability to raise debt," he added.
S&P has also limited the use of FERs to transactions rated by it, to reflect the idea that a proper deal assessment cannot be made without detailed knowledge.
