INSURANCE: Strength in Numbers: How Does Your Insurance Company Rate?

Joseph Catanese

You probably knew that insurance companies can rate you, but did you know that they have ratings, too? Insurance rating agencies and systems have gained considerable prominence in the last decade as several high-profile insurance agency insolvencies have led institutional investors, insurance policyholders, agents and others to demand an objective, third-party analysis.

Ratings agencies compliment other regulatory activities affecting insurance companies and can provide businesses with the impartial information necessary for an educated buying decision. Consisting of independent, well-analyzed opinions on insurance carriers' financial strength, rating services offer insight into changing industry dynamics, competitive concerns and a company's creditworthiness.

A.M. Best, Moody's Investor Service and Standard & Poor's Insurance Rating Service all evaluate insurance companies based on:

* Financial strength;

* A company's solvency, or how the company's assets plus its surplus compare to its liabilities and projected reserve requirements;

* The soundness of a company's method of determining reserves; and

* Liquidity, including assets and the ability to pay obligations.

One of the most recognized ratings in the insurance industry are those given by A.M. Best Co. of Oldwick, N.J., and London. Founded in 1899, A.M. Best was established to help protect consumers from insurer insolvency and play an objective role in the industry. The company's rating system serves as a guide to determine a company's financial strength by providing a market profile and an evaluation of the financial condition and operating performance of insurance companies worldwide. A.M. Best also publishes a Financial Performance Rating (FPR) of each company it rates. The company currently rates more than 2,600 property/casualty carriers and more than 1,700 life and health insurance companies.

Standard & Poor's, New York, initially began publishing financial assessments of the nation's railroads, and has become respected in the insurance industry for its accuracy and integrity. Standard & Poor's credit ratings may apply to an insurance company's general creditworthiness or to specific financial obligations. Long-term ratings range from "AAA," which reflect the strongest credit quality to "D," the lowest.

Similar to Standard & Poor's, John Moody began to analyze railroad securities in 1909. In the 1970s, Moody's ratings were extended to include the insurance industry. Today, New York-based Moody's Investor Services provides ratings for nearly 300 property and casualty insurers, as well as life insurers, financial guarantors and major reinsurance companies.

These types of ratings can be important when you are purchasing a policy that is "non-admitted," which is a policy that is not covered by a state's insurance guarantee fund. As a result, if the insurance company is unable to pay your claim, the state fund will not protect the policyholder. When your insurance company has a strong financial rating, however, a non-admitted policy becomes less of an issue.

Today, businesses with marginal financial strength - including insurance companies - can be affected greatly by external regional, political, market and economic instabilities. Add to this concern some attention-getting insurance company insolvencies, and it's easy to conclude why insurance industry ratings are gaining attention.

Recognizing the importance of rating systems to insurance consumers, insurance companies have focused on understanding how ratings are assigned and are implementing programs to improve a poor rating or maintain a strong rating.

While ratings are important, the major focus of your insurance buying decision should be on the specific policy details, such as premium cost, deductibles and self-insured retention as well as a company's waste industry knowledge. But as with any purchasing decision, buying from a financially strong company is a wise practice in managing your company's risks.