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Getting a Handle on Your Insurance Company’s Stability and Strength – A Brief Guide to the Rating Agencies

Long before 9/11, insurer stability was an important but overlooked factor in the insurance purchase decision.   Now, after 9/11, it can no longer take a back seat to issues like coverage or price.  Insurer insolvencies are on the rise as old liabilities such as asbestos come back to haunt some companies, and newer exposures such as corporate scandals, accounting irregularities and toxic mold threaten to keep actuaries busy for years to come.  With the above in mind, how does one factor the financial strength of insurance companies in to the buying decision? 

The answer lies somewhere between Standard & Poors, Moody’s, Duff & Phelps, Fitch and the granddaddy of them all, A.M. Best. All the aforementioned companies provide some kind of measure of insurer stability and financial strength.  All use different scales, different factors and somewhat different terminology in their analyses.  Invariably, all the rating agencies use a mixed bag of criteria to develop their ratings and they all do comprehensive analyses of the companies with a “Readers Digest” version often available online for free. 

Let’s take a quick tour of the A.M. Best rating structure just to get a taste.  As always, your agent is a good source of information regarding the companies you are insured with or contemplating insuring with, but feel free to browse the Best, S & P or any of the other websites for your own edification as well.

A.M. Best (http://www.ambest.com)

A.M. Best provides ratings according to financial strength and size.  There are sixteen distinct financial strength ratings which are further boiled down to ten general descriptors, such as “Superior”, “Excellent”, “Very Good”, etc.  It’s worth noting that many in the insurance industry consider anything below “Excellent” to warrant caution, especially if it is the result of a recent downgrading from a higher rating.  Such a downgrading often precedes a further downgrading so it is important to look into the history and see what the rating has been over the past two or three years or longer.

In addition to the above general descriptors, there are further categorizations within the A.M. Best rating structure.  The “Superior”, “Excellent” and “Very Good” rating descriptors and their respective ratings all comprise the “Secure” category of ratings.  Everything else gets lumped into the “Vulnerable” category.

A.M. Best also has financial size categories that measure the company according to factors such as statutory surplus, a measure of the capacity of the company to pay claims.  Larger companies with higher statutory surplus will end up on the higher end of the scale, which tops off at XV (15) while smaller, less well-heeled companies will end up on the lower end, starting at I or 1.   A company with an A++(XV) rating by A.M. Best receives top honors and would appear to be the “best” bet for the long haul.  Though financial stability is an important factor, other factors, like a good reputation for paying claims should weigh in the decision making process.  Again, talk to your agent and find out more about the companies you are considering purchasing coverage from.  They will be happy to give you insight into the history of the company and point you in the right direction to access available resources to help you make an informed decision.  While there are no crystal balls that can predict the future outlook for your insurer of choice, there are certainly benefits to making an informed purchase decision.