FROM THE LEARNING CENTER

Insurance Company Ratings Explained: What You Need to Know

by Ben Hsieh | October 04, 2021

5.5 Minute Read

Insurance might be one of the more serious purchases of your life, but buying it isn’t much more different than buying a car or choosing which restaurant to eat at (even if it’s less glamorous).

That means doing some research before signing on the dotted line, of course.

While comparing insurance companies, you’re likely going to ask yourself which company:

  • has the best customer reviews?
  • offers the most coverage for my money?
  • has the best insurance rating?

An insurance company rating should always be a major part of the insurance buying process. A high rating is a good indicator that you’re making a smart financial decision, after all.

What is an Insurance Company Rating?

An insurance company rating, also called a credit rating, is typically provided by one of five independent agencies – A.M. Best, Kroll Bond Rating Agency, Fitch, Standard & Poor’s, and Moody’s. The rating is an assessment of the financial strength of an insurance company. 

In other words, an insurance rating measures an insurer’s claims-paying ability, especially in times of financial stress or increased claims. The better a company’s insurance rating, the more likely it will be able to meet its claims obligations.

After all, you wouldn’t buy a policy from an insurer that doesn’t have the financial stability to pay out a claim. No one wants to pay premiums for years, only for the insurance company to be deemed insolvent and unable to pay out.

On the flip side, insurance ratings are not indicators of how a company’s investments are performing. Insurance company ratings focus only on the future ability of a company to pay its obligations. 

How Do Rating Agencies Determine Their Ratings?

Rating agencies use a bunch of different criteria to rate life insurance companies. Some common criteria include: 

  • Risk management systems
  • Cash on hand
  • Market position
  • Ratio of debt to assets
  • Risk of policyholders
  • Revenue stream diversity

Similar to how your personal credit scores are calculated, each of the five insurance rating organizations use their own scale and methodology to rate insurance companies. So, one reviewer’s rating of an insurance company, and the way they got there, isn’t necessarily the same for all reviewers.

How To Interpret Insurance Ratings

Because ratings can vary from agency to agency, it’s important to consider ratings from more than one agency before settling on an insurance company. A top-rated company by Fitch ratings, for example, might have a lower rating according to A.M. Best.  

And many insurance companies advertise only their highest ratings, so keep that in mind when shopping around. 

Financial Strength Rating Scales

Insurer financial strength ratings look similar to a school report card — and in a way, they are. Most rating agencies are fairly uniform with their best ratings and use A’s or A+’s to denote the top-rated companies. The lower ratings are where rating agencies really differ.

Complaint Indices

The National Association of Insurance Commissioners (NAIC) considers the ratio of complaints received (and reported by each state’s Department of Insurance) to the total number of insurance policies to come up with a ‘complaint index’ for each insurance company. 

Consulting this metric can help give you a good idea of what to expect in customer service from each company. The best companies for customer satisfaction have indices lower than 1, while companies with more complaints have indices greater than 1. 

Along with the complaint index, be sure to consult other resources like Better Business Bureau (BBB), google reviews, Facebook, and Yelp to get a fuller picture of how happy customers are with a particular company. 

How Do You Find an Insurance Company’s Insurance Rating?

Dig into a company’s website, “about” page, and FAQ to find their rating, partner, or owner. Companies like to brag, so if their rating is good, it’ll probably be easy to find. Kind of like proudly displaying a good report on the fridge.

At Bestow, for example, a quick glance at our FAQ will reveal that our policies are issued by North American Company for Life and Health Insurance® — an A+ rated insurer.

Other startups, like Lemonade, are insurance carriers and will have their own rating. In Lemonade’s case, for its home, auto, renters, and pet insurance products, it has been given a financial stability rating of A-Exceptional by Demotech, an insurance rating company similar to A.M. Best. 

Do All Insurance Companies Have Ratings?

In some cases, an insurance company won’t have an insurance rating.

Don’t worry — there’s usually a good reason they don’t.

Insurance ratings are assigned not only to insurance companies, but also to insurance operating holding companies. Some companies partner with or are owned by companies who do have ratings, which you can then use as a placeholder for their likely grade.

What Is Reinsurance?

Every insurance company aims to attain — and maintain — a high insurance rating. After all, the better the rating, the more likely a company can meet its claims obligations, and the more likely people like you will purchase their policies.

It makes sense, then, that companies want to protect their ability to meet their financial obligations.

Insurance companies mitigate their risk by purchasing reinsurance. Reinsurance minimizes the liability of the insurer and works to prevent insolvency after an extreme event results in a high amount of unexpected claims.

For example, insurance company X underwrites policies, and those policies are then reinsured by reinsurer Y. Each company shares a bit of the risk so no one company holds it all.

Though each state requires insurance companies to hold a specific cash reserve to prevent insolvency, reinsurance lessens the need for a company to tap into its reserves.

Reinsurance works in one of two ways:

  • By paying part of an insurance company’s claims in exchange for part of each premium collected
  • By paying an insurance company’s claims after it has paid out a defined total.

Using Insurance Ratings To Decide On Life Insurance

After comparing a couple of different ratings, you’ll have a solid picture of an insurance company’s financial strength, which can help you decide whether or not you trust them to cover you.

An insurance company rating should never be the sole factor in your decision to buy an insurance policy, but it does shine a light on a company’s financial stability. Insurance companies are expected to be there when you need them most so the higher their rating, the more likely they’ll be financially stable for the long haul.