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How to check insurance company ratings for financial strength

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5 mins

Every time you make a premium payment to your life or disability insurance company, you're fulfilling your part of the contract to pay for coverage offered by the insurer. By accepting the premium, the insurance company is fulfilling its role to provide you protection against financial loss. Because of their obligation, the claims-paying ability of the insurance company and their financial strength need to be of significant concern when selecting your insurer.

But, how can you be sure the company you intend to select has the financial strength and cash reserves to pay claims filed? Fortunately, there are several rating services that examine a number of variables and assign a rating to each insurer. This can be of great help to you as you pick between companies when applying for coverage.

As when making just about any type of purchase, it's essential to compare not only prices but also the strength of the company. When you purchased your last vehicle, you probably not only looked at cost; maybe you even looked at the reliability of both the manufacturer and the dealer. You wanted the reassurance of knowing that they had a track record of safety and dependability; that your vehicle would last for years, and the dealer would be there to provide service when you needed them.

The same is true for insurance purchases. When you buy insurance, you want it to be for the long-term and not have to switch companies regularly. You want to know that the company is offering you a product that is going to get the job done for you and that they're going to be there when you need them, whether it's providing service or paying a claim. Rating services can give you that confidence.

Insurance company rating services

These services rate insurance companies using various criteria. Their ratings are opinions of an insurer's financial strength and solvency, not facts. Each service's evaluation of a particular insurance company doesn't necessarily match up with another's.

The overarching goal of each service is the same: to determine and rate the ability of each insurance company to meet its ongoing financial obligations. Their ratings help you to asses an insurer's ability to pay you or your family the benefits they promised when you applied for coverage.

You can find insurance company ratings from several services:

No two services are alike in how they designate ratings. They all use different scales. For example, A.M. Best system consists of 13 ratings (A++ to D); Standard and Poor's has 21 different categories (AAA to C); Moody's includes 21 classes (Aaa to C).

Insurance company rating criteria

What criteria are used when determining a rating for an insurer? All rating services examine the strength of a particular company based on:

  • Amount of cash on hand
  • Debt ratio (debt divided by financial assets)
  • Diversity of revenue streams
  • Risk management protocols
  • Quality of insurance policies written

Much like insurance company underwriters take numerous factors into account when deciding whether or not to issue coverage to an applicant, an analyst working for a rating service will crunch the numbers and make a decision as to the ratings for a given insurer. While numerical data is the primary consideration in determining a rating, there is a degree of subjectivity as well.

AM Best insurance ratings

Arguably the best known and most respected of all the rating services for insurance companies is AM Best. The company was founded in 1899 and is the world's first credit rating agency. Starting from a one-room office in New York City, the company has grown to be the largest credit rating agency in the world and specializes in the insurance industry.

In the words of the company, "Our credit ratings summarize our opinion on an insurance company's ability to pay claims, debts, and other financial obligations in a timely manner." Their ratings are often quoted by insurance companies, agents, and brokerage firms.

The AM Best financial strength rating scale is broken down as follows:

  • A+ or A++ Rating = Superior Financial Strength
  • A or A- Rating = Excellent Financial Strength
  • B+ or B- Rating = Good Financial Strength
  • B or B- Rating = Fair Financial Strength
  • C+ or C++ Rating = Marginal Financial Strength
  • C or C- Rating = Weak Financial Strength
  • D Rating = Poor Financial Strength

Accordingly, you could interpret these ratings as a company having an A rating would be more likely to meet its ongoing financial obligations than a company rated B+ or B++.

Accordingly, you could interpret these ratings as a company having an A rating would be more likely to meet its ongoing financial obligations than a company rated B+ or B++.

Many people use not just one rating service when assessing financial strength; they look at several and draw their conclusions based on a composite. Even using such a system isn't foolproof, as Enron had high ratings from every service before its collapse in 2007.

When purchasing disability insurance, examining and evaluating insurance company ratings before deciding on who to buy coverage from makes good sense. While the largest companies have very strong ratings, many smaller companies also provide excellent, comprehensive coverage and have top ratings as well. In addition to finding a company's ratings online, a licensed agent can help you decide on the best carrier for your disability insurance coverage.

Get a personalized disability quote in seconds.

Jack Wolstenholm is the head of content at Breeze.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published May 18, 2020
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