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When you buy insurance, you agree to pay regular premiums with the expectation that you will receive a payout on your claim if something goes wrong. But what if you spend years paying regular fees, only to be denied the money you are owed when you need it most?
Insurance carriers are just like regular businesses. While some may be reputable and prosperous, others can be irresponsible and poorly managed. These irresponsible carriers will willingly accept your money, but ultimately leave you in the cold when they are unable to pay. The possibility of an insurance carrier reneging on their obligations is not as unheard of as many people assume.
Insurance Carrier Ratings attempt to distill an insurance carrier’s trustworthiness and financial stability into an easy to understand letter grading system. These ratings can help you make better decisions when you are shopping for an insurance provider and ensure that you don’t get the raw end of the deal.
How do Insurance Carrier Ratings work?
Insurance Carrier Ratings are put out by independent insurance rating organizations and measure the financial strength of insurance companies. The most reputable insurance rating organizations are the “big four”: AM Best, Standard & Poor’s, Moody’s, and Fitch. These independent rating organizations use many factors to comprehensively evaluate an insurance provider’s financial stability. The rating organization then assigns a letter grade based on their research that can range from AAA or A+ to F. These letters measure the likelihood that your insurance company will be able to pay your claim. A rating from a reputable insurance rating organization is the most reliable way to assess an insurance carrier.
A+ or AAA rated insurance companies are unlikely to face insolvency within the coming year, barring an unforeseen natural disaster. Likewise, F rated insurance companies are usually facing liquidity problems and you should not obtain insurance from them. It is generally recommended to purchase insurance from insurance carriers with rating of “B” or higher.
What are Insurance Carrier Rating organizations?
Insurance Carrier Ratings are put out by Insurance Carrier Rating organizations. Each organization has its own unique formula, so you are advised to only compare Insurance Carrier Ratings to other companies within the same rating organization. For example, an “A+” at one rating organization may be equal to an “AAA” at another. An “A” at one company may be the best possible rating, while an “A” at another insurance rating organization might only be slightly better than average. Insurance Carrier Rating grades aren’t universal, so make sure to include the name of the rating organization whenever you discuss ratings.
|AM Best||Fitch||Moody's||Standard & Poor's|
|Superior ability to meet their ongoing insurance obligations.||The lowest expectation of default risk. Exceptionally strong capacity for payment of financial commitments||Highest quality, subject to the lowest level of credit risk.||Extremely strong capacity to meet financial commitments.|
|A, A-||AA+, AA, AA-||Aa1, Aa2, Aa3||AA|
|Excellent ability to meet their ongoing insurance obligations.||Expectations of very low default risk. Very strong capacity for payment of financial commitments||High quality, subject to very low credit risk.||Very strong capacity to meet financial commitments.|
|B++, B+||A+, A, A-||A1, A2, A3||A|
|Good ability to meet their ongoing insurance obligations.||Expectations of low default risk. The capacity for payment of financial commitments is considered strong.||Upper-medium grade, subject to low credit risk.||Strong capacity to meet financial commitments.|
|B, B-||BBB+, BBB, BBB-||Baa1, Baa2, Baa3||BBB|
|Fair ability to meet their ongoing insurance obligations. Financial strength is vulnerable to adverse changes in underwriting and economic conditions.||Expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate.||Medium-grade, subject to moderate credit risk and may possess certain speculative characteristics.||Adequate capacity to meet financial commitments.|
|C++, C+||BB+, BB, BB-||Ba1, Ba2, Ba3||BBB-|
|Marginal ability to meet their ongoing insurance obligations. Financial strength is vulnerable to adverse changes in underwriting and economic conditions.||Elevated vulnerability to default risk.||Judged to be speculative, subject to substantial credit risk.||Considered lowest investment-grade by market participants.|
|C, C-||B+, B, B-||B1, B2, B3||BB+|
|Weak ability to meet their ongoing insurance obligations. Financial strength is very vulnerable to adverse changes in underwriting and economic conditions.||Material default risk is present, but a limited margin of safety remains. Capacity for continued payment is vulnerable to deterioration in the business and economic environment.||Considered speculative, subject to high credit risk.||Considered highest speculative-grade by market participants.|
|D||CCC+, CCC, CCC-||Caa1, Caa2, Caa3||BB|
|Poor ability to meet their ongoing insurance obligations. Financial strength is extremely vulnerable to adverse changes in underwriting and economic conditions.||Default is a real possibility.||Speculative of poor standing and subject to very high credit risk.||Less vulnerable in the near-term but faces major ongoing uncertainties to
adverse business, financial and economic conditions.
|Default of some kind appears probable.|| |
Speculative and likely in, or very near, default, with some prospect of recovery of principal and interest.
|More vulnerable to adverse business, financial and economic conditions
but currently has the capacity to meet financial commitments.
|A default or default-like process has begun. Payment capacity is irrevocably impaired.|| |
The lowest rated and typically in default, with little prospect for recovery of principal or interest.
|Currently vulnerable and dependent on favorable business, financial and
economic conditions to meet financial commitments.
|Payment default but has not entered into bankruptcy filings, liquidation, or other formal winding-up procedure, and has not otherwise ceased operating.||Highly vulnerable; default has not yet occurred, but is expected to be a virtual certainty.|
|Ceased business and has entered into bankruptcy filings, liquidation, or other formal winding-up procedure.||Currently highly vulnerable to non-payment, and ultimate recovery is expected to be lower than that of higher rated obligations.|
|Payment default on a financial commitment or breach of an imputed promise; also used when a bankruptcy petition has been filed or similar action taken.|
Though an insurance carrier ranked well by one organization will usually be ranked well by others, formulas between Insurance Carrier Rating organizations differ slightly. When you assess an insurance provider’s financial stability, look at the ratings from multiple organizations to make sure that you are getting the full picture.
Reputable Insurance Carrier Rating Organizations
Though there are many Insurance Carrier Rating organizations, notable and reputable insurance carrier rating organizations include:
- AM Best
- Standard & Poor’s
- Weiss Ratings
Among these, four rating organizations stand out as being especially renowned for this service: AM Best, Moody’s, Fitch, and Standard & Poor’s. They are all officially recognized by the U.S. government and the SEC as Nationally Recognized Statistical Rating Organizations (NRSRO). Their ratings are considered reputable enough that they are used for regulatory purposes by the U.S. government.
How do Insurance Carrier Rating organizations evaluate insurers?
Insurance Carrier Rating organizations evaluate insurance companies on a variety of factors. One of the most important factors in calculating an Insurance Carrier Rating is the amount of money the insurance company has in their financial reserve. When you submit your claim to an insurance company to receive your payout, the money you are paid comes from a central pool of money. A barren reserve means that the insurance company will not be able to pay out any claims. Companies with bigger reserves tend to have higher Insurance Carrier Ratings.
Other factors that impact Insurance Carrier Ratings including:
- Financial flexibility
- Investment risks
- Competitive positioning
- Enterprise risk management
- Interest rates
- Holding company/affiliates
Though there are some differences in the way that different rating organizations assess insurance carriers, they usually follow a similar formula. Ratings are not only based on the financial track record of the insurance carrier, but also the stability of their primary state or country. A reputable insurance carrier in the United States will receive a higher Insurance Carrier Rating than an insurance provider with a similar track record in a country like Brazil. Though an insurance company may be financially responsible, their Insurance Carrier Rating will go down if they pay out too many claims. This is why insurance companies can go bankrupt in the event of a natural disaster that causes them to overdraw their financial reserves.
What is a good Insurance Carrier Rating?
Ratings systems vary by rating organization. The best rating is usually “AAA”, “A+”, or “A”. It is generally recommended to avoid purchasing insurance from a company that is rated below a “B”.
Ratings don’t tend to change dramatically from year to year, usually moving up or down by a letter grade at most. However, once you have purchased your insurance from a reliable insurance carrier, you should continue to check its Insurance Carrier Ratings, as it can change over time.
Limitations of Insurance Carrier Ratings
Insurance Carrier Ratings assess the financial stability of insurance companies in an attempt to predict if they will be able to pay out your claim. Remember that no insurance carrier is infallible, and in the event of a widespread natural disaster, a company that originally seemed reliable can be driven into bankruptcy. For example, Northern California insurance company Merced Property & Casualty Co. was rated “A-” by AM Best, but the company faced bankruptcy following the 2018 California wildfires.
There are factors beyond Insurance Carrier Ratings that come into play when choosing an insurance carrier. Just because an insurance company has a high Insurance Carrier Rating does not necessarily mean you should buy from them. Some carriers might have the financial reserves to afford to pay your claims but might deny valid claims, have unusually high premiums, or offer lackluster customer service.
Alternative Ways to Evaluate an Insurance Carrier
Insurance Carrier Ratings are not the only means of evaluating whether an insurance carrier is reliable. When you investigate an insurance carrier, you should also take these additional metrics into consideration:
- Number of states in which they operate – the larger the number of states that an insurance carrier operates in, the more reliable they are in general.
- History of customer complaint – resources like the Better Business Bureau can help you determine if a carrier offers good customer service. The National Association of Insurance Commissioners (NAIC) also evaluates a company’s “complaint index,” or the ratio of customer complaints to insurance policies.
- Investment portfolio – high-risk investments, like defaulted mortgages and junk bonds, have ruined formerly reputable insurance companies in the past. Choose a company with safer investments.
- Reinsurance policy – if an insurance carrier isn’t able to make payments to policyholders, they may choose to sell your policy to another company.
- Age of the company – newer providers are usually less reliable and lack a track record you can use to predict how they will behave in the future. Fifty years of experience is ideal.
- Premiums – a riskier provider may be worth it if you can achieve a substantially lower premium.
You can use organizations like J.D. Power and Associates, the Comdex Ranking, or the Better Business Bureau to help you determine if an insurance carrier is financially secure and otherwise easy to do business with.
When it comes to deciding on an insurance carrier for your business, Insurance Carrier Ratings are a necessary tool to make the most informed decision possible. Insurance rating organizations like AM Best, Moody’s, Standard and Poor’s, and Fitch all perform extensive evaluations of the financial stability of insurance companies around the world. These ratings allow you and your business partners to avoid paying premiums to a company that won’t pay you the funds that you are owed.
Though Insurance Carrier Ratings are a necessary part of making a decision about your insurance carrier, they are not sufficient. Other factors like customer service and their willingness to pay out claims should also affect your choice of insurance provider. Ultimately, Insurance Carrier Ratings offer a simplified shorthand for determining whether you should trust the insurance company you are considering.