Insurance Company Ratings Explained: What You Need to Know
Insurance might be one of the more serious purchases of your life, but buying it isn’t much more different than buying a car or choosing which restaurant to eat at (even if it’s less glamorous than either).
That means doing some research before signing on the dotted line, of course.
While comparing insurance companies, you’re likely going to ask yourself which company:
- has the best customer reviews?
- offers the most coverage for my money?
- has the best insurance rating?
And… what does that rating even mean?
An insurance company rating should always be a major part of the insurance buying process. A high rating is a good indicator that you’re making a smart buying decision, after all.
What is an Insurance Company Rating?
An insurance company rating is an indicator as to the financial strength of an insurance company. In other words, an insurance rating is a rating company’s informed opinion of how likely it is a given company can pay its customers’ claims.
After all, you wouldn’t buy a policy from an insurance company that doesn’t have the financial stability to pay out a claim. No one wants to pay premiums for years, only for the insurance company to be deemed insolvent and unable to pay out.
Insurance ratings rate the possibility of that scenario. The better a company’s insurance rating, the more likely it will be able to meet its claims obligations.
On the flip side, insurance ratings are not indicators of how a company’s investments are performing. Insurance company ratings focus only on the future ability of a company to pay its obligations.
What is Reinsurance?
Every insurance company aims to attain — and maintain — a high insurance rating. After all, the better the rating, the more likely a company can meet its claims obligations, and the more likely people like you will purchase more policies.
It makes sense, then, that companies want to protect their ability to meet their obligations.
Insurance companies mitigate their risk by purchasing reinsurance. Reinsurance minimizes the liability of an insurance company and works to prevent insolvency after an extreme event results in a high amount of unexpected claims.
For example, insurance company X underwrites policies, and those policies are then reinsured by reinsurer Y. Each company shares a bit of the risk so no one company holds it all.
Though each state requires insurance companies to hold a specific cash reserve to prevent insolvency in the event of unexpected and excessive claims, reinsurance lessens the need for a company to tap into its reserves.
Reinsurance works in one of two ways:
- By paying part of an insurance company’s claims in exchange for part of each premium collected
- By paying an insurance company’s claims after it has paid out a defined total.
Extreme weather, like a brutal hailstorm or hurricane, can contribute to a massive increase in insurance claims. In 2016 alone, hail damage in Texas resulted in $8.4 billion in losses.
Who Rates Insurance Companies?
There are four major rating companies: Fitch, Moody’s, Standard & Poor’s, and A.M. Best. Each of the four (and their other competitors) use proprietary scales to rate an insurance company. As a result, one company’s rating isn’t necessarily equivalent to another’s.
A.M. Best is the oldest of the four major rating companies. Compared to its competitors, A.M. Best is the only company to focus solely on rating insurance companies.
The A.M. Best Financial Strength Rating Scale
Insurance company ratings look similar to a school report card — and in a way, it is. Of the different A.M. Best ratings to look at, your attention should be given to the financial strength rating of any insurance company you’re considering buying from.
A.M. Best ranks each insurance company with a letter grade and often a plus or minus. Ratings might also include a second plus or minus, called a “notch,” that further expresses the degree of the rating.
The A.M. Best financial strength rating scale is an indicator of the company’s ability to meet ongoing insurance obligations.
|A+ or A++||Superior|
|A or A-||Excellent|
|B+ or B++||Good|
|B or B-||Fair|
|C+ or C++||Marginal|
|C or C-||Weak|
According to the A.M. Best rating scale, a company with a financial strength rating of “A” would be considered more able to meet its ongoing insurance obligations than a company with a “B+” or “B++” rating.
How Do You Find an Insurance Company’s Insurance Rating?
In some cases, an insurance company won’t have an insurance rating.
Don’t worry — there’s usually a good reason they don’t.
Insurance ratings are assigned not only to insurance companies, but also to insurance operating holding companies. Some companies partner with or are owned by companies who are rated by A.M. Best and others.
Before buying insurance, dig into a company’s website, “about” page, and FAQ to find their rating, partner, or owner. In most cases, an insurance rating will be easily found, especially if their rating is favorable.
Insurtech startups like Bestow are the perfect example of a company that partners with others. In our case, a quick glance at our FAQ will reveal that our partners are all rated A+, or superior, by A.M. Best.
Other startups, like Lemonade, are insurance carriers and will have their own rating. In Lemonade’s case, it has been given a financial stability rating of A-Exceptional by Demotech, an insurance rating company similar to A.M. Best.
Because most insurance companies will only show the highest rating they’ve earned, it’s worth comparing their ratings from various competitors. This can be accomplished via databases provided by a rating company.
For example, if a company advertises its “A” rating from A.M. Best, compare it to the rating assigned to it by, say, Moody’s or Fitch. While the actual letter rating might change, make special note of the rating description, such as “excellent.”
After comparing a couple of different ratings, you’ll have a solid picture of an insurance company’s financial strength, and an answer to whether or not they can be trusted to cover you.
An insurance company rating should never be the sole factor in your decision to buy an insurance policy, but it does shine a light on a company’s financial stability. Insurance companies are expected to be there when you need them most so the higher an insurance company’s rating, the more likely they’ll be financially stable for the long haul.