What is an Insurance Company Rating?
An insurance company rating is a measure issued by a third-party agency that considers a variety of factors to arrive at a letter grade. The better the grade, the better the financial standing of the insurance company.
What insurance company ratings measure
Essentially, these ratings indicate the level of financial stability at the insurer. This matters because when you buy insurance, you do so under the assumption that the insurer will be able to pay out your claim. It would be a worst-case scenario to pay your life insurance premiums your entire life only for your beneficiaries to find that the life insurer can’t pay out the death benefit after you pass away.
To help consumers avoid insurance companies that could be anywhere near insolvency, rating agencies analyze a variety of factors and issue a grade to each insurer. Generally, the rating agency considers:
- The amount of cash the insurer has in reserve
- Their history of paying claims
- Their debt-to-income ratio
- The gross and net profits
- Their risk management practices
- Their projected cash flow
- Their operations, including organizational structure
The rating process and the factors considered vary from agency to agency.
Who rates insurance companies
Several agencies evaluate and rate the financial standing of insurance companies. The five best-known and most-trusted insurance company rating agencies are:
A.M. Best Company, Inc. A.M. Best issues A through D letter grades with + or – designations. An A++ is their highest rating. Along with A+, it makes up their “Superior” tier. An A or A- indicates that an insurer is in their “Excellent” tier.
Standard & Poor’s Insurance Ratings Services. Similarly, S&P issues A through D grades, but rather than plus and minus designations, they use repeat letters. More letters indicates a higher rating (e.g., AAA is higher than AA, which is higher than A). Along with a D (i.e., default) rating, they also issue an SD rating. Both suggest that the insurer has a high likelihood of financial difficulties.
Moody’s Investor Services. Like S&P, Moody’s uses letter grades for their long-term ratings, with more letters indicating a higher rating. An Aaa is their highest rating, followed by Aa and A. From there, it’s Baa, Ba, and so on down to Ca and C, their lowest long-term rating. Moody’s also issues short-term ratings, which measure an insurer’s ability to meet their short-term financial obligations. Here, the ratings from highest to lowest are P-1, P-2, P-3, and NP.
Kroll Bond Rating Agency, Inc. (KBRA). KBRA scores just like S&P, but they add one lower rating beneath D: an R-rating, which indicates that the insurer is under regulatory review.
Fitch Ratings. Fitch scores like KBRA and S&P, but they may also add a + or – designation for their ratings AA through CCC. Below a C rating, they also add an RD (restricted default) and D (default) rating.
On their respective websites, you can access the ratings from all of these agencies for free. Some require you to register for an account in order to access their ratings.
The subjectivity of ratings
While an insurance company rating is a well-researched, trusted measure of an insurance company’s financial standing, it can be considered an opinion more than fact. The agency arrives at the rating using their own proprietary algorithm, which weights factors according to their internal values.
As you research ratings, you might notice that ratings for the same company vary between different rating agencies. That’s indicative of the subjective nature of insurance ratings.
How to use an insurance company rating
Just because insurance company ratings are somewhat subjective doesn’t mean you should toss them aside. They’re an important measure of the insurer’s ability to pay out a claim for yourself or your beneficiaries.
Before you buy a policy from any specific insurance company, research their rating from at least one trusted agency. If they’re not A-rated, carefully evaluate whether that company — and the potential risk of nonpayment they present — is the right fit for you.
Other third-party ways to measure insurance companies
While insurance company ratings give you a way to understand the financial standing of an insurance company, they don’t present a comprehensive picture of the insurer. In addition to looking at a company’s rating, you may also want to check their J.D. Power rating, which measures customer satisfaction, and their report in the National Association of Insurance Commissioners’ (NAIC) Consumer Information Source. The NAIC issues a complaint index. The higher the number, the more complaints that insurer has against them.