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Insurance Company Ratings: What You Need to Know Before Choosing a Policy

What Are Insurance Company Ratings? 

Insurance company ratings are ratings assigned by agencies that assess an insurance company’s financial strength. Insurance ratings measure factors, including a company’s sustained ability to pay claims, its ability to withstand a shaky economy, and its debt ratio. Some agencies only rank insurance companies, while others grade various business types.

The significance of the ratings for prospective customers cannot be understated. When shopping for a new health, life, home, or auto insurance policy, you can compare insurance company ratings to ensure your carrier can pay your claims and serve your long-term needs.

Why Do Insurers Need To Be Rated?

Insurance company ratings underscore a company’s creditworthiness and reliability in paying out claims. Though different agencies score companies using their own scales, a high rating can help you rest assured that your provider can meet your needs when the time comes. The rating of insurance companies holds insurers to the highest of industry standards and also helps consumers make informed decisions when choosing coverage.

How Do Insurance Company Ratings Work? 

Rating agencies evaluate an insurance company’s financial strength and creditworthiness, especially based on its history of paying customer claims.    

Which Institutions Are Rated? 

The insurance rating system covers all types of insurers. The top insurance rating agencies evaluate companies that provide coverage to consumers in the following categories:

  • Health: Insurance company ratings can help consumers find reliable insurance providers they can trust to pay out claims promptly and accurately.
  • Life: An A+ life insurance rating helps reassure consumers that their policy will pay out death benefits to their loved ones when the time comes.  
  • Property/Casualty: This broad category of insurance ratings includes homeowners, liability, and auto coverage.
  • Reinsurance/Specialty: Reinsurance coverage acts as insurance for insurance companies. Specialty insurance includes cases that require high-risk or complex coverage.
  • Bonds: Bond insurance ratings reflect a bond-issuing company’s creditworthiness and the overall quality of its products.

Who Are The Ratings Agencies? 

There are five primary insurance ratings agencies for insurance companies:

  • A.M. Best
  • Demotech
  • Fitch
  • Moody’s
  • Standard & Poor

A.M. Best and Demotech exclusively rate insurance companies, while the remaining agencies on the above list also rate other types of institutions. With a focus on insurance, A.M. Best and Demotech evaluate providers of all types of coverage. Each agency utilizes its own methodology to rate insurance companies on a letter scale. A.M. Best’s 15 possible rates range from a low F to a top score of A++, while Demotech assigns one of five rates from L to A.

What Do The Ratings Measure?

Rating agencies use various metrics to assess an insurer’s overall performance. Factors typically include the following:

  • Debt ratio
  • Cash liquidity at any given time
  • Risk management initiatives
  • Diversity of revenue
  • Quality of coverage

While these are the major factors, exact methodologies vary by agency. Insurance ratings measure how likely a provider is to make good on customer claims, based on past behavior.

Overall, agencies aim to capture a holistic picture of the insurance company’s financial strength and fortitude, especially in uncertain economic times or while enduring financial hardship. This process often relies on documentation, including balance sheets, income statements, and cash flow statements. 

How Do Consumers Use The Ratings?

Insurance company ratings are useful for consumers shopping for reliable coverage. You should look at a company’s potential vulnerabilities and ability to pay claims in the long run, a feature critically important to health and life insurance plans.

While every agency classifies and weighs criteria differently, a rating at or near the top of the scale typically denotes a high level of financial strength. An A+ rating at one agency might equal what another agency calls an A++; however, both ratings likely reflect the same relative score. Companies with a rating near or at the lowest letter, especially from multiple rating agencies, should be considered unreliable options for coverage. 

Are Ratings The Only Way To Research Insurers?

Insurance ratings are just one way for consumers to perform due diligence on insurers. You should always check for your company’s “score” from multiple rating agencies. Reviewing insurance company ratings in combination with other methods of research provides the most thorough representation of an institution’s financial strength.

You might begin by contacting your state insurance department to confirm the company meets state licensing requirements, especially if the institution is not a household name. Beyond insurance ratings and state licensure, you can further explore a company’s successes or shortcomings through consumer advocacy sites and read peer reviews online or through the company’s social media sites.

Do The Ratings Favor Larger or Smaller Institutions?

While the insurance rating system applies to institutions of all sizes, larger, well-known insurance companies tend to hold an advantage over smaller institutions. Rating agencies typically take into account a larger company’s past ratings when assessing its performance, which perpetuates the cycle of high ratings and keeps prices competitive for customers.

Ratings also inherently favor larger institutions when it comes to meeting other criteria. Large insurance companies are more likely to offer diverse coverage options, greater availability, and better customer service, all of which are evaluated by rating agencies in their report. Smaller companies may still earn a high rating despite potentially offering limited options or coverage.

How To Use Ratings To Pick A Life Insurer 

Ratings can be especially insightful for prospective life insurance customers. Learn how to use insurance company ratings to your benefit before choosing your preferred life insurance plan.

Select The Right Insurer For Your Needs 

Life insurance companies typically offer term or whole life insurance plans, each with their own terms and benefits. Most term life insurance policies cover a period of 10-30 years and pay out benefits only if the policyholder dies during that period, while whole life insurance is permanent and lasts for the lifetime of the policyholder, as long as premiums are paid.

Selecting the right insurer for your life insurance benefits is a highly personal decision. You must consider factors including how much coverage you need and how much you can afford to pay each month in premium costs. Consumers need to know their money is going to a trustworthy provider, so choosing from only the most reliable insurers is critical.

Check The Institution’s Rating 

Some institutions with high ratings proudly post their scores on their website or publish them in printed marketing materials. While this sometimes provides a convenient method of comparing the ratings of top insurers, rating agencies are the best way to verify such claims for authenticity.

A company that posts its rating will also name the agency that assigned the score. You can easily search for your insurance company on that rating agency’s website or call the toll-free number listed on their site to verify the letter rating of your insurer.   

Understand the Scale

As mentioned in the above section, each rating agency maintains its own scale. A company may have as few as five or as many as 15 possible letter scores, so make sure you are looking at your insurer’s unique scale to help you interpret the rating results.

Generally, a well-known insurer with a rating ranging from A to A++ is acceptable; however, a seemingly slight difference between ratings can make a big difference on an abbreviated scale. Read through your insurer’s particular methodology for assigning each letter score on the scale.

Consider the Rating Along With Other Factors

You should consider multiple factors when shopping for a life insurance provider. Even though rating agencies use their own methodology to evaluate insurers, the rating of insurance companies is a standardized process that measures the same performance criteria across multiple entities. 

Your process might incorporate additional research for a more personalized approach. A company’s J.D. Power score and/or National Association of Insurance Commissioners index can shed light on its customer complaint record. Red flags would include multiple bankruptcies or lawsuits brought by customers in a company’s past.

Continue Checking Ratings

You should continue to check your company’s ratings even after you have selected and purchased a policy. Many large companies with high ratings stay that way from year to year; however, they must keep performing at a high level to maintain their rating.

You may choose to switch coverage if your insurer’s rate starts to slip. Most insurers allow customers to end coverage during the renewal period of their policy, which varies by plan. If your insurance company rating takes a drastic dive, for example if it goes out of business, your policy is protected under your state’s insurance guaranty association.      

What Insurance Ratings Mean For You

Insurance company ratings provide a business snapshot of financial strength and stability. In the broader sense, insurance ratings drive best practices among insurers, especially when it comes to paying out life insurance benefits and providing above-average customer service. 

The rating of insurance companies can also help consumers choose high-quality coverage. Customers should review insurance ratings from more than one rating agency, along with peer reviews, state licensing requirements, and financial history, to select a trustworthy and reliable carrier. Working with a reputable insurance broker or agent may help narrow your search. 

Plan for your family’s future. Get a life insurance quote today.

Get a quote

Plan for your family’s future. Get a life insurance quote today.

Get a quote