What Are Insurance Company Ratings? Why Do They Matter?

Insurance companies assess possible clients for risk factors. Check potential insurers the same way before signing a policy.

Your insurance policy is a promise from your provider that they’ll reimburse you for covered losses. With this promise on the line, you must choose a reliable insurer strong enough not to break it.

Predicting which insurer can withstand the fluctuating global market and changes in the insurance industry is complicated. At least, it’s difficult for you to do on your own. It’ll require you to review hundreds of pages of financial documents written in brain-twisting jargon an ordinary consumer won’t understand.

So how can you assess an insurer’s financial strengths? By consulting the findings of independent credit rating agencies.

Read on to learn more about:

The definition of an insurance company rating;
Why it’s essential to look into when buying insurance;
And where you can find insurer credit ratings.

I | What's an Insurance Company Rating?

Insurance company ratings are scores created by independent rating agencies to indicate an insurer’s financial strength. This rating is based on the final assessment of data gathered by these agencies, considering various factors.

An insurer’s ability to fulfill its ongoing financial obligations (e.g., claims payment history)
The financial health of the company (e.g., financial reserves, balance sheet, diversity in revenue streams)
The company structure and management style
Risk management protocols for external factors like natural disasters
The terms and quality of policies offered

A rating agency will analyze the above information and evaluate a company’s financial performance. In the end, they summarize the data in a simplified alphabetical scale for the stability and reliability of the company’s finances.

Ratings vary across agencies.

The standards for grading depend on the agency, as each has its unique rating scale and alphabetical gradings. One insurance company can have more than one grade. Some of the gradings may look the same but have different meanings.

An A+ from A.M. Best is the next-to-top rating of its 15 categories. An A+ from Fitch, Kroll, or S&P is their 5th-highest rating (out of 24 categories for Fitch, 22 for Kroll, and 19 for S&P). Moreover, Moody’s doesn’t have an A+ rating. (Source)

Because of the discrepancies in financial strength ratings, it’s best to consult two or more agencies before settling on an insurer. You can find ratings for all types of insurance, including business, auto, home, life, and health. Like the rating system, the criteria for assessing the kind of insurance will also vary.

Despite the advantages, insurer credit ratings are considered opinions, not facts. All the same, these opinions carry weight in swaying public perceptions of a company’s financial health.

II | Why Financial Rating Matters

Considering an insurance carrier’s financial health and stability is paramount because of the company’s financial obligation to you.

Rating agencies exist to aid consumers in choosing the right company to protect their investments. They spend hours analyzing and evaluating a company’s financial performance. Knowing the credit rating of your present or potential insurer is worth the time.

Here’s why.

Reliability of Coverage

Many individuals and businesses take out coverage for protection against significant financial losses. Be it for the loss of their home, vehicle, etc. Monthly premiums are investments set aside for these events.

You’ll have a problem if your insurance carrier cannot repay said monies for covered losses. Rating agency reviews set benchmarks for the quality of insurance. Knowing this information can help you shop for the most reliable coverage possible.

Legal Protections

Besides the potential risks of physical damages, there is also the matter of lawsuits. Depending on the provisions in your policy, your coverage will pay for legal services. Again, your insurer’s track record for settling claims is paramount in you mounting your defense. In some cases, if the payout’s sufficient, you can compensate affected third parties, eliminating the need for litigation.

It Bolsters Business Reputation

If you own a business where showing proof of insurance is a requirement, your insurer’s financial strength is an advantage.

Not holding a policy with a strong company listed with an A-rating could mean the difference between winning or losing a contractor bid.

Your insurance policy is only as reliable as the provider backing it. Review the strength of insurance providers, and choose one with a reputable standing. The higher the rating score, the higher the chance that the company in question will be around for the long haul.

The Scores Aren’t Perfect

The rating agencies’ evaluations give a company the best rating based on its present situation. Although the assessments consider a company’s ability to bounce back after a disaster, the scope of the declared disaster is unpredictable.

Take, for instance, Merced Insurance. It received an A-rating from A.M. Best, yet California regulators seized the company in 2018 because it could not pay out claims following a massive wildfire that destroyed thousands of homes.

III | Companies That Provide Financial Ratings for Insurers

There are many independent ratings companies and groups in America. The four most common and respected major rating agencies are:

A.M. Best
Fitch
Standard & Poor’s
Moody’s

A.M. Best Insurer Credit Ratings

Out of all the insurance company rating agencies mentioned above and otherwise, A.M. Best is considered the premier choice in the industry. The company focuses solely on insurance companies, offering an alphanumeric scale ranking companies from Superior down to Poor.

Fitch, Standard & Poor’s, and Moody’s evaluate a wide variety of other industries, including insurance.

IV | What Is an A-Rated Insurance Company?

An A-rated insurance company meets the following criteria:

It’s financially sound and presents minimal to no immediate risks of financial failure.
It can meet its financial obligations outlined in the policies they issue.
It offers reliable and customer-friendly services, placing your needs upfront with customized packages that suit your financial and personal needs.
It has an ethos or culture of honesty. It’s open about possible rating increases and policy changes and doesn’t use bad faith tactics to avoid paying out legitimate claims.
It’s responsive when you have a problem and is willing to work with you promptly to resolve them.

Keep your standards high and work with insurers that meet them.

Conclusion

The financial ratings of insurance providers matter. The quality of a policy reflects the quality of the company.

Take a page out of your insurer’s book and review their creditworthiness. Assess how much of a risk you’re accepting by investing your premiums into their care.

Credit rating agencies do most of the work, summarizing their findings, so you don’t have to read hundreds of financial documents. Go with a collective consensus.

On top of their credit rating, bear in mind these additional factors: