Running a business is not without risk, and unforeseen circumstances can introduce more risk than you might realize. Business Liability, Professional Liability (Malpractice insurance, Errors and Omissions (E&O) insurance), and other policy types are common for professionals and small businesses to protect against financial loss. But what do you really know about your insurance company and its ability to have your back when you need it?
The financial strength rating of an insurance company is crucial when considering coverage. The rating is based on the likelihood that the company will have enough money to pay claims, especially during widespread events such as natural disasters that can put financial pressure on a company when it is facing many claims at once.
As a customer, you want your insurance company to pay your claim — even if it has a lot of claims at once. This is where the financial rating of the company comes in. You’ll want to choose a company with solid financial backing, that won't leave you with large fees and regretting your choice in providers. Here’s what you need to know about financial ratings of insurance companies before you buy a policy.
First Things First: Some Insurance Terms, Defined
Let’s first explain some of the terms we use in this article, as they can get confusing.
Insurance Company, Insurance Carrier, or Insurer: What’s the Difference?
These names might sound different, but they actually mean the same thing. Insurance carrier, insurance company and the insurer all refer to the financial resource backing the insurance policy — and, ultimately, the payor of the claims. You might also see the term “underwriter” or “underwriting company,” which means the same thing too. As an example, Berkshire Hathaway Specialty Insurance Company (BHSIC) is the underwriter of Berxi insurance policies.
Insurance Agent or Insurance Broker: What's the Difference?
Although the insurance company is the financial resource backing your insurance policy, you may not deal with the company directly when buying your policy. For that, you might go to an insurance agent or insurance broker. You have probably heard these terms before but may be unsure of the difference.
In short, an insurance agent typically works for an insurance company and is often the person you talk to in customer service. They are there to answer questions about the policy on behalf of that specific carrier. They also have the authority to sell or “bind” a policy, meaning they can turn your quote for an insurance policy into an enforceable contract.
In contrast, an insurance broker is independent and can offer you insurance options from a number of different carriers. They cannot bind the policy (only an agent can do that), and they don’t handle claims if you have one filed against you. They often work on commission and can charge service fees.
How Does Insurance Work?
Insurance companies exist to help offset your risk. At its simplest, an insurance policy is an agreement to compensate the insured in case of a covered loss. Meaning, if you have a claim that is within the terms of the policy, the company will pay you for it.
When buying a policy, you transfer the risk of something bad happening from you to the insurance company. Of course, yours isn’t the only policy they have. Money from all the policy premiums is placed in an “insurance risk pool” or “risk pool,” from which claims are paid. And because the possibility of all the customers filing a claim at the same time is improbable, the insurance companies can run their businesses and use these funds to pay claims, legal fees, and settlements, when needed.
Why Are Insurance Companies Rated?
When choosing an insurance company, you might think about referrals from friends, your experience with customer service people, and the price (or quote) you received for your policy. But what about the company’s ability to pay your claim? That’s where insurance ratings come in.
Financial strength ratings predict the insurance company’s ability to pay claims promptly and honor debts and other financial obligations on time.
A high rating means the carrier is financially sound and likely to stick around. A low rating could mean trouble for a company’s financial health if it faces a struggling economy, increased claim volume, or other financial hardships.
How Are Insurance Companies Rated?
Independent rating agencies issue financial ratings for insurance companies to show the insurer's financial strength. Several factors are used in the evaluation, including how much cash the company has in reserve and whether it previously reported a profit. Other common insurance rating criteria include:
- Debt ratio: A metric that looks at all the carrier’s debts (total money owed) and divides it by the financial assets the company has (property, bank accounts, etc.)
- Revenue stream diversity: New and different ways to bring money into the organization.
- Protocols for risk management: Processes to minimize financial loss.
- Quality of insurance policies written: Including customer experience, covered events, and clarity of coverage.
Every rating agency has its own criteria and rating scale, so you may see different ratings from each independent rating agency.
Who Rates Insurance Companies?
Five top independent agencies rate insurance companies:
- AM Best
- Fitch Ratings
- Kroll Bond Rating Agency (KBRA)
- Moody’s
- Standard & Poor’s
AM Best is the largest insurance rating agency in the world. It’s been in business since 1899 and operates in more than 100 countries. However, ratings from Fitch, KBRA, Moody’s, and Standard & Poor’s are also common in the insurance industry.
What Do Insurance Ratings Mean?
The rating assesses the financial strength and capacity of an insurance company to meet its obligations. It’s not just about how much money the insurer has on hand. Insurance rating agencies also consider factors like financial size, financial strength, issue and issuer credit ratings, and national scale ratings.
Financial Size Category
The [Financial Size Category](http://web.ambest.com/ratings-services/financial-size-category-(fsc) (FSC) demonstrates the size of the company based on the reported policyholders’ surplus. Policyholder surplus is the money that’s left after subtracting the company’s liabilities from its assets. Essentially, it’s a financial cushion to protect policyholders, similar to how an emergency fund works in personal finance.
Financial Strength Rating
The Financial Strength Rating (FSR) is the rating agency’s opinion about a company's financial security. It considers the ability to pay the policies and contracts by their terms but does not consider the company’s ability to pay nonpolicy debts.
Many insurance brokers, agents, and other professionals in the insurance industry rely on the rating to advise clients, policyholders, and investors. But it is not used as a recommendation to purchase or cancel a policy.
Issuer Credit Rating
The Issuer Credit Rating (ICR) is a forward-looking measurement of a company’s (issuer’s) overall creditworthiness. It shows the rating agency's opinion of the company’s ability to meet its future financial commitments. It does not look at specific obligations, standing in bankruptcy, or enforceability of commitments.
The short-term ICR covers obligations typically lasting less than a year, while long-term covers beyond one year.
Issue Credit Rating
The Issue Credit Rating (IR) assesses the default risk and recoverability for a specific obligation, class of responsibilities, or specific program. However, it also considers the currency of the commitment and predicts the company’s capacity and willingness to meet its obligations.
The IR can include terms, collateral, and other factors affecting payout. It has short-term (less than one year) and long-term (more than one year) values.
National Scale Rating
A National Scale Rating (NSR) evaluates the carrier's creditworthiness and capacity to meet obligations compared to others in a region or country. With NSR, the rating agency gives a rank order of risk for carriers in the country. Since this rating is against others in the same region or country, it can’t be used to rate carriers in different countries.
How Do I Find Out How My Insurance Company Is Rated?
Many insurance companies list their financial ratings on their websites. However, you shouldn’t rely only on what the company says. The carrier might showcase a higher rating from one agency and not display a lower one from another. It’s best to look for yourself.
Visit the top rating sites to find out an insurer’s rating. AM Best might be the easiest to use. It has a search option on the main page that lets you enter the company’s name. You can also look for ratings from the Insurance Information Institute (Triple-I). For example, Triple-I lists the top 10 writers of insurance on its insurance company rankings page.
What Does It Mean if My Insurance Company Is Not A++ Rated?
If your insurance company isn’t rated A++, you may have nothing to worry about. Only one rating agency issues an A++ rating — AM Best. The top rating from Fitch, Moody’s, and Standard & Poor’s is AAA, so you won’t see an A++ from those agencies.
| Ratings Agency | Ratings Offered (highest to lowest) |
|---|---|
| AM Best | A++, A+, A, A-, B++, B+, B, B-, C++, C+, C, C-, D |
| Fitch | AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D |
| Moody’s | Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C |
| Standard & Poor’s | AAA, AA, A, BBB, BB, B, CCC, CC, C, R, SD, D |
Understanding Insurance Company Credit Ratings
Financial strength ratings are a simple method to assess a carrier’s financial strength. Some of the biggest insurance companies in the U.S. have strong financial ratings. While an A++ or AAA is a good sign that the insurance company has solid financial footing, what if a company has a BBB or C rating?
Here’s a general guide to financial strength ratings based on AM Best’s rating scale:
| Rating Category | Rating Symbols | Rating Notches* | Definition |
|---|---|---|---|
| Superior | A+ | A++ | The company has a superior ability to meet its ongoing insurance obligations. |
| Excellent | A | A- | The company has an excellent ability to meet its ongoing insurance obligations. |
| Good | B+ | B++ | The company has a good ability to meet its ongoing insurance obligations. |
| Fair | B | B- | The company has a fair ability to meet its ongoing insurance obligations but is vulnerable to changes in underwriting and economic conditions. |
| Marginal | C+ | C++ | The company has a marginal ability to meet its ongoing insurance obligations and is vulnerable to changes in underwriting and economic conditions. |
| Weak | C | C- | The company has a weak ability to meet its ongoing insurance obligations and is very vulnerable to changes in underwriting and economic conditions. |
| Poor | D | - | The company has a poor ability to meet its ongoing insurance obligations and is extremely vulnerable to changes in underwriting and economic conditions. |
Final Thoughts
When searching for an insurance company to protect your business and assets, you want to ensure that you choose the right one. The right insurance provider for you will depend on your budget and coverage needs. Make sure you choose a company with a solid insurer financial rating. That way, you can feel confident it’ll have the financial ability to pay your claim if you ever need to file one.
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