Insurance financial enhancement is when an insurance company uses its financial strength with an insurance policy to insure a third-party obligation or asset or to provide liquidity in a capital market structured transaction, usually to the benefit of a third party, such as an investor. Unlike with most traditional lines of insurance business, timeliness of payment is critical, leaving little, if any, time for investigation at the time of a claim. The risks cannot be measured in terms of premiums but rather in respect to risk in force or insured risk. Because much of the business is related to the capital markets, this usually means principal and interest are insured.
Standard & Poor's Ratings Services created its financial enhancement rating service to help with the evaluation of transactions in which an insurer provides full or partial credit support of a Standard & Poor's-rated transaction. Although capital-markets participants are accustomed to full and timely payment in accordance with the terms of the transaction, the claim-payment culture of multiline insurers is not necessarily focused on timeliness. As a result, the traditional practice of multiline insurers of analyzing and investigating claims might not meet the expectations of fixed-income, capital markets investors that expect prompt payment and could very well lead to a default on the insured obligation.
The financial enhancement rating process analyzes whether an insurer wishing to provide credit support under a policy of insurance has the understanding, willingness, and capacity to make timely payment under the policy. Multilines with financial enhancement ratings are expected to honor claims irrespective of legal precedents and commercial disputes.
Below is the list of insurers with financial enhancement ratings as of May 1, 2006.
Insurer Financial Enhancement Ratings As Of May 1, 2006
Company
Financial Enhancement Rating
ACA Financial Guaranty Corp.
A
AEGON Schadeverzekering N.V.
AA
AIG Life Insurance Co.
AA+
Alleanza Assicurazioni SpA
AA
Allianz Risk Transfer
AA-
Allianz Risk Transfer (Bermuda) Ltd.
AA-
Allianz Risk Transfer N.V.
AA-
Ambac Assurance Corp.
AAA
Ambac Assurance U.K. Ltd.
AAA
American International Specialty Lines Insurance Co.
