Understanding Insurance Carrier Financial Ratings
When choosing an insurance carrier to cover your business, there are many factors to consider. Price and customer service are often at the top of this list—no one wants to overpay for coverage, and you want your claims paid out in a fair and timely manner.
Another piece to this puzzle that bears consideration is the insurance carrier financial ratings, or their ability to pay out claims, if necessary. Many insurance buyers take this aspect for granted. Widespread disasters, such as hurricanes or wildfires, can test an insurance carrier’s financial strength. In fact, insurance carriers with poor financial strength can go bankrupt as a result of these disasters.
There are a number of rating agencies out there, and each one has their own criteria and rating system. In other words, ratings may not be consistent across all agencies, and an A+ rating may be high for one agency, but not as impressive for another. While each rating agency uses its own criteria, they will commonly evaluate a carrier’s financial performance, management performance, strategy, market size and vulnerability to disasters, among many others.
AM Best
AM Best is one of the best-known independent credit rating agencies for insurance companies. They have been in business since 1899 and operate not just in the United States, but internationally as well. Insurance is the only industry they provide ratings for, and you will often see insurance carriers tout their AM Best rating in marketing materials.
They issue a number of credit-related ratings, including the Financial Strength Rating (FSR). The FSR is essentially the opinion of AM Best and represents the insurance carrier’s ability to meet policy and contractual obligations. AM Best has the following designations for its FSR:
- Superior: A++, A+
- Excellent: A, A-
- Good: B++, B+
- Fair: B, B-
- Marginal: C++, C+
- Weak: C, C-
- Poor: D
It should be noted that E and F are designations, not ratings. These letters indicate the insurance carrier has been publicly placed into conservation/rehabilitation (E) or liquidation (F).
In addition to the rating, AM Best will also provide an opinion outlook. This opinion generally looks ahead about three years and is either positive, negative or stable:
- A positive outlook shows that the insurance carrier is experiencing favorable trends. If these trends continue, the rating could be upgraded.
- A negative outlook shows that the insurance carrier is experiencing unfavorable trends. If these trends continue, they could be downgraded.
- A stable outlook shows the insurance carrier is experiencing stable conditions and the rating is unlikely to change.
Ratings are determined initially and updated periodically. The rating can be changed, withdrawn or suspended at any time. Ratings can be found by subscribing to AM Best, but most insurance carriers will have their rating on their website, marketing materials or annual reports.
Big Three Rating Agencies
AM Best is one of the better-known rating agencies for insurance carriers, but is by no means the only one or the most accurate. The big three credit rating agencies, in no particular order, are Fitch Ratings (Fitch), Moody’s and Standard & Poor’s. These agencies also provide credit ratings of insurance carriers.
Fitch
Fitch is one of the traditional big three raters. The big three look not just at the insurance industry, but all industries. Fitch has been in business since 1914, and its rating system is as follows: AAA, AA+, AA, AA-, A+, A, A, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C and D.
Please note that this is not a like-to-like comparison with AM Best, as criteria is going to differ. Under the Fitch rating system, anything rated BBB and up is considered investment-grade, while anything rated BB or below is non-investment-grade.
Moody’s
Moody’s is another of the big three for all industries. They were founded in 1909, and their rating system is as follows: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca and C. Anything Moody’s-rated Baa3 and up is considered investment-grade, while anything rated Ba1 or below is considered speculative or non-investment-grade.
Standard & Poor’s
Standard & Poor’s, which was founded in 1860, is the third and oldest of the big three and looks at all industries. Their ratings are as follows: AAA, AA+, AA, AA-, A+, A, BBB, BB, B, CCC, CC, C, R, SD and D. Anything Standard & Poor’s-rated BBB and above is considered investment-grade, while anything rated BB and below is speculative or non-investment-grade.
Because these rating agencies are all making an opinion, it is worth looking into other agencies, especially because they often disagree. However, it is important to note that, while some of the scales may use the same rating, they don’t necessarily mean the same thing. Take a flat A rating, for example. For AM Best, this is their third-highest rating, but it is just the sixth-highest for Fitch and Standard & Poor’s.
Evaluating Insurers
The insurance carrier financial ratings are an important piece of your decision-making process when choosing a carrier; however, it is by no means the only factor to consider. Consult with your insurance broker to choose the best carrier in which to trust your business to.
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