The Importance of Understanding Insurance Carrier Financial Ratings
Most consumers consider the cost of insurance premiums as their main buying criteria. The main factor that insurance buyers should consider as they price shop their insurance, however, is the financial rating and stability of the insurer they choose.
Financial Ratings Matter
Just as your customers have a credit rating, insurers do, as well. Insurance company ratings assess an insurer’s ability to meet its obligations; with the most important obligation being the payment of claims made under its book of business.
In today’s hard market environment more than ever, the consumer often focuses solely on the price, where frequently to your customer, cheaper is better. However, there is another critical factor your insureds should consider when selecting an insurance provider—The financial stability and rating of the company.
How does a financial rating affect both you and your client? A financial rating reflects a company’s ability to pay claims, even amid substantial loss events. A higher rating increases the likelihood that the insurer will cover claims promptly, even during catastrophic events affecting a large region. And writing business with a carrier who falls below an acceptable rating can create an errors & omissions issue should that insurer fail.
Fortunately, financial ratings for insurance companies are publicly accessible. When obtaining a quote, do you include this information or provide it solely upon request?
Common Rating Companies
There are at least four reputable agencies assessing the financial strength of insurance companies. Here are four of the best-known agencies.
- A.M. Best
Widely regarded as a leading authority, the United States Securities and Exchange Commission (SEC) endorses A.M. Best. This agency focuses exclusively on the financial strength and solvency of insurance companies, analyzing both current data and long-term trends. To check an insurer’s rating through A.M. Best, visit www.ambest.com. You may have to create an account.
- Moody’s
Another well-respected rating company, Moody’s, provides an overview of the carrier’s financial strength, overall market risk and performance.
- Standards & Poor’s (S&P)
S&P rates businesses in a variety of industries, including insurers. Again, the focus is on the financial stability of the insurer. Reach S&P at this link. https://www.spglobal.com/ratings/en/products/credit-ratings
For regional or newer insurers, Demotech offers an alternative to A.M. Best. Specializing in assessing niche insurance carriers serving smaller markets, some lending companies may not accept Demotech ratings. You can access their reports at https://www.demotech.com/
- Demotech
What Rating Should You Accept?
Bear in mind that different lenders and risk managers may only accept ratings from certain rating agencies. Again, not all insurers will have a rating, and that can make determing their viable much more difficult.
Insurance companies may not be required to obtain an official financial rating. However, most choose to do so because agents, brokers, and investors heavily rely on these assessments. Industry experts generally recommend selecting insurers with a minimum rating of A- or higher. As one savvy broker told me, “A ‘B’ rating can collapse in a few days.” We also know that in this current environment,
However, ratings vary widely among rating bureaus. An A+ from A.M. Best may not equate to an A+ with other rating agencies.
Your insured can help track any changes to their carrier’s solvency, but ultimately, it’s up to you to keep them informed of any rating downgrades that may impact their ability to recoup their losses after a claim. This is especially crucial for homeowners in coastal regions or areas of tornadic activity, where severe weather events can create significant financial pressures on insurers.
Why Monitor Your Insurers’ Ratings?
As an agent, should you check ratings yearly? Generally, if you follow insurance news, you will know when and which insurers are downgraded by rating bureaus. However, a best practice should be to check the insurer’s rating each year at all policy renewals and warn the insured immediately of any adverse downgrades. Our EO Guardian website offers members specific letter templates you can use to warn of downgrades.
Even well-managed companies can encounter financial trouble unexpectedly. Take the example of AIG’s government bailout, which unfolded with little public warning. Homeowners do not want to discover their insurance provider is insolvent when they need to file a substantial claim.
For coastal homeowners, ensuring their carrier can handle catastrophic losses is paramount. Companies serving small, concentrated areas must have strong financial backing to withstand challenges like widespread storm damage. An insurer rated A- or better is more likely to meet these demands.
Annual monitoring of your insurer’s financial stability is essential. Watch for any downgraded ratings or warning signs. If your provider’s rating declines, investigate further by contacting your agent and discussing alternative options for coverage.
Make Monitoring a Priority
Taking a few moments each year to verify your insurer’s financial health can give you peace of mind. If calamity strikes and you need to file a significant claim, you will want confidence that the insurance companies you represent are adequately prepared to deliver on their promises.
For an in-depth article on insurance company ratings, visit this link from the Insurance Information Institute.
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