Did you realize that virtually every insurance company is given a yearly grade? This grade or “rating” is an indicator of the overall financial health of the insurer. There are several organizations tasked with monitoring the financial condition of insurance companies: Standard & Poors, Weiss, Demotech and Moodys. The most widely cited and recognized authority is the A.M. Best Company. The company was founded in 1899 by Alfred M. Best and today is one of the premier sources of news and information about the insurance and financial services industries.
A.M. Best provides an unbiased examination of an insurer’s assets, surplus (financials reserves to pay claims), creditworthiness, and overall claims-paying ability. This is information that you, as a consumer, should evaluate any time you consider purchasing an insurance policy. Each insurer is assigned a letter grade or financial strength rating, a financial size category, and a rating outlook.
Understand Financial Strength Ratings
The financial strength rating or FSR is a rating of the insurer’s relative ability to meet its ongoing insurance obligations. In layman terms, the higher the grade, the stronger the insurance company is financially. Ongoing obligations refer to current and future expected claims, such as catastrophic hurricane or earthquake.
A.M. Best assigns a letter grade as below:
|A++, A+ (Superior)||B, B- (Fair)|
|A, A- (Excellent)||C++, C+ (Marginal)|
|B++, B+ (Good)||C, C- (Weak)|
|E (Under Regulatory Supervision)|
|F (In Liquidation)|
You should look for insurers with only the highest ratings. At Safeguard Insurance, we typically work with insurance companies that are rated A (excellent) or higher.
Understand Financial Size Category
In addition to the letter grade or rating, A.M Best discloses the size of the insurer’s policyholder surplus (PHS). The surplus is, essentially, the net worth of the insurance company or how much money is available to pay claims. This can be a useful metric, but keep in mind that bigger is not necessarily always better. Many smaller regional insurance companies have a high letter grade, but a smaller financial size category (FSC). However, these smaller companies have only a fraction of the risk exposure of larger insurance companies. For example, a catastrophic hurricane in the Gulf states might have no effect on an insurance company that only writes policies in the western U.S.
The FSC is assigned as follows:
|Class||Adj. PHS ($ Millions)||Class||Adj. PHS ($ Millions)|
|I||Less than 1||IX||250 to 500|
|II||1 to 2||X||500 to 750|
|III||2 to 5||XI||750 to 1,000|
|IV||5 to 10||XII||1,000 to 1,250|
|V||10 to 25||XIII||1,250 to 1,500|
|VI||25 to 50||XIV||1,500 to 2,000|
|VII||50 to 100||XV||2,000 or greater|
|VIII||100 to 250|
As a matter of precaution, Safeguard Insurance typically works with insurers who have an FSC of VIII or higher.
In addition to the FSR and FSC, A.M. Best also publishes a Rating Outlook that points to the general direction a particular is headed in. This is useful for consumers to evaluate if the insurance company, while presently strong, is headed in the wrong direction. Conversely, an insurer that has a lower rating, such as “A” may show a positive outlook that indicates they are recovering from a bad year or two. The rating outlook is assigned as follows:
|Positive||Indicates possible rating upgrade due to favorable financial/market trends relative to the current rating level.|
|Negative||Indicates possible rating downgrade due to unfavorable financial/market trends relative to the current rating level.|
|Stable||Indicates low likelihood of a rating change due to stable financial/market trends.|
We feel it is important that our customers are aware of the grade their particular insurance company has been given. As an insurance buyer, you should carefully consider this information before purchasing any policy.
Grading Insurance Companies
It is also important that you also understand what the A.M. Best rating does not tell you. It is not a grade based on how well the insurance company does its job. In other words, just because a particular insurance company is rated “A+” does not mean consumers should expect a perfect, hassle-free claims experience and a customer service department filled with happy people. How to pick that winning insurance company is a topic for another post.