Discovering Your Insurance Company’s True Financial Health: A Consumer’s Guide to Stability Ratings

When choosing an insurance company, you’re not just buying a policy – you’re entering into a long-term financial relationship that could span decades. The last thing you want is to discover your insurer can’t pay claims when you need them most. Understanding insurance company financial ratings is your first line of defense against choosing an unstable provider that might leave you financially vulnerable.

Why Insurance Company Financial Stability Matters

Insurance ratings evaluate a company’s financial stability and capacity to fulfill its obligations. You’re depending on that company to be around to pay a claim — promptly and efficiently. The goal of insurance company financial ratings is to evaluate financial strength: how able they are to withstand a struggling economy, increased claims or other financial hardships.

Consider the real-world implications: Merced Insurance had an A− rating from AM Best but went bankrupt in 2018 after the extensive wildfires in California that year. This example illustrates why understanding ratings is crucial, even when they appear strong on the surface.

The Major Rating Agencies You Need to Know

Five independent agencies—A.M. Best, Fitch, Kroll Bond Rating Agency (KBRA), Moody’s and Standard & Poor’s—rate the financial strength of insurance companies. Each agency brings unique perspectives and methodologies to their evaluations.

A.M. Best Company

The most well-known insurance specific rating company, the scores provided by AM Best are often considered the yardstick for financial strength in the industry. The highest rating offered is A++ (Superior) while the lowest is a D (Poor). AM Best does not rate any other kind of businesses other than insurance companies.

Standard & Poor’s

Unlike A.M. Best, Standard & Poor’s rates businesses across all industries, including insurance. They rate the ability and willingness of companies to meet their financial obligations on time and in full. Or, in other words, they rate the likelihood that an insurance company can and will pay out your claim in a timely manner.

Moody’s

Moody’s Corporation analyzes insurance providers for financial stability, market risk and overall performance. They do this with the intent of determining, like other rating companies, how likely an insurance company is to be able to pay out your claim on time.

How to Research Your Insurer’s Ratings

There are five major agencies that rate insurance companies on a regular basis and offer their ratings and analysis online free of charge; although, most require registering with them before you can read their ratings. Here’s your step-by-step research process:

1. Check Multiple Sources: The agencies disagree often enough so that you should consider a company’s rating from two or more agencies before judging whether to buy or keep a policy from that company.
2. Understand Rating Scales: Comparing ratings from different rating services can be tricky. Each rating agency has its own rating scale, and the agency may change its scale or the symbols and descriptions it uses. Letter ratings and descriptive words don’t have the same meaning for each agency.
3. Stay Current: Moreover, agencies will announce changes of ratings on any day. It’s probably prudent to check annually on the ratings of any company you’re interested in.

What the Ratings Actually Mean

These agencies look at financial leverage, management stability, recent performance, and the rated company’s overall financial situation. External factors such as competition, diversification, and market presence may also be considered.

For practical guidance, A COMDEX score of 90 or above places a company in the top tier of all rated insurers and is a strong indicator of long-term financial stability. For basic term life coverage, a score of 85+ is generally sufficient.

Beyond Financial Ratings: Additional Research Steps

An insurance company’s financial stability is far from the only thing to consider. A good starting point for evaluating overall quality of service is how many complaints the insurance company has received. No company is perfect, but more complaints may mean they can’t provide an adequate level of service.

The National Association of Insurance Commissioners calculates every insurance company’s complaint index based on the number of complaints the company receives compared to the amount of insurance they sell.

Working with Independent Agencies for Better Protection

When researching insurers, consider working with independent insurance agencies that can compare multiple carriers. For example, Premier Choice Insurance, an independent agency located in Mesa and Peoria, Arizona, works with multiple insurance companies to help clients find the most financially stable options. Companies like american summit insurance company and others in their network undergo thorough financial review processes to ensure client protection.

Locally owned and operated, Premier Choice Insurance was founded on the simple but timeless principle to provide the most complete, comprehensive and competitive insurance products at the highest level of service to each and every one of our customers. Independent agencies like Premier Choice can provide valuable guidance in interpreting financial ratings and selecting stable insurers.

Red Flags to Watch For

Be cautious of insurers that:

• Have drastically different ratings across agencies without clear explanation
• Show declining ratings over consecutive periods
• Lack ratings from major agencies entirely
• Have high complaint ratios with state insurance departments
• High-risk investments (junk bonds and defaulted mortgages, for example) have caused the downfall of several large insurance companies such as Executive Life, First Capital Life, and Monarch Life

Making Your Final Decision

Every agency has its own methodology and scale, so ratings will vary somewhat. But all ratings companies base their decisions on approximately the same data. If an insurance company has a drastically different rating from one agency to another, you should do more research to determine why.

Remember that While agency ratings can give you a good idea of an insurance company’s financial stability, they aren’t perfect… So take these ratings with a grain of salt. Use ratings as one important factor in your decision-making process, but combine them with research into customer service, claims handling, and overall reputation.

Understanding insurance company financial ratings empowers you to make informed decisions about your coverage. By taking the time to research your insurer’s stability, you’re protecting not just your assets, but your peace of mind. In an industry where your financial security depends on your insurer’s ability to pay claims, knowledge truly is your best protection.