What is an unrated insurer?

An unrated insurer is an insurance provider who has not been awarded or currently holding any form of financial strength rating. These ratings are provided by international rating agencies such as Standard & Poors, Moody’s, and Fitch and can be used to gauge their stability and most importantly the ability to pay claims. The rating methods can vary between different agencies however the most common is letter grades scoring the degree of risk, for example, A-C. Due to the lack of rating these insurers can be at a greater risk of failure, leaving customers without cover and exposed to financial losses.

In the UK there are currently no legal requirements for insurers to be rated and also no requirement for brokers and price comparison sites to exclude them either.

So, what are the risks?

While technically any rated or un-rated insurer could collapse, statistically an un-rated insurer has a far higher likelihood under the parameters used by the international rating agencies. This primarily presents a risk to the insured leaving them out of pocket and uninsured.

If an insurer goes into liquidation there are usually a few outcomes. The best for the insured is that the FSCS steps in, which it did recently in the case of the Gefion collapse. They protect if claims occur or were being dealt with before they went bankrupt. They also sometimes refund all or part of the premium back to the customer. Both of these are great situations, however, it is rare they go as smoothly or quickly as you may hope. The worst outcome which occurs Is cover is cancelled immediately and no compensation is provided. This can be particularly troubling for companies such as taxi firms who require insurance by law to operate but frequently end up turning to unrated insurers due to their high-risk nature.

If they are so bad, why do people turn to unrated insurers?

Well, there are some benefits to un-rated insurers. If you are in a scenario where no traditional insurance avenues are available, then having insurance from an unrated provider is better than nothing at all and typically an unrated insurer can be found to cover more difficult risks.

Price is also a deciding factor as sometimes they are far more competitive than rated insurers. This nevertheless is what can make them a less stable provider and we believe that price shouldn’t be the primary deciding factor for insurance cover. Particularly if the difference between rated and unrated is small.

To conclude.

You should always refer to your insurance broker particularly when it comes to unrated insurers. They will provide you with the best options available to your situation and advise you which is the best to take. In an ideal world, everyone should use rated insurers, but sometimes this just isn’t possible.