Insurance Company Ratings Provide Confidence and Peace of Mind

Life insurance companies are regulated by the departments of insurance in individual states in which they seek to be licensed or certified to operate and sell insurance. Typically, one of the regulations is that an insurance company be rated. A.M. Best Company and Standard & Poor’s are two of the premier rating agencies.

There are several advantages for insurance companies to submit for a rating, according to Tina Bukow-Truman, Senior manager Business Development for Ratings at A.M.Best. “Some do it for third-party oversight—like an additional pair of eyes looking at financial strengths,” she told MillionaireCorner.com. “Another reason is market credibility. A rating also provides greater transparency, which is a big buzz word these days.”

But mostly, she said, it’s all about solvency. A consumer wants first and foremost to know that their insurance company will be able to pay off a claim.”Our job is to protect the folks buying these policies,” she said.

Ratings offer more than consumer confidence and peace of mind. For the rated company, it creates benchmark standards that show how they stack up against other companies. In the case of A.M. Best, there are two categories of ratings: “Secure” and “Vulnerable.”  For example, a rating lower than a B+  means a company is no longer investment grade.

A.M. Best assigns three types of ratings. One is an independent opinion of an insurer’s financial strength and ability to meets its ongoing insurance policy and contract obligations. Another rates an insurer/entity’s ability to meet its ongoing senior financial obligations. The third rates an issuer’s ability to meet its ongoing financial obligations to security holders when due.

Bukow-Truman called the rating process “very interactive. It is quantitative and qualitative. Quantitative is based on the balance sheet. It’s all about the numbers. The qualitative aspect is based on the company itself, the operating performance, the business plan strategies, management and the company’s experience.”

In addition to A.M. Best and Standards & Poor's, other leading insurance company financial rating services companies are Moody’s, Weiss, and Duff & Phelps.If an insurance company you are interested in is not rated by these agencies, it may not be because it has a poor rating. Ratings are voluntary, and it could mean the insurance company has chosen to not be rated or has not paid the required fee to the agency to be reviewed by them.