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Insurance companies are subject to financial ratings that attempt to describe how financially stable they are. The most prominent financial ratings agency for insurance companies is A.M. Best, though the big credit agencies all look at insurers, too. You should consider an insurance carrier's financial rating before purchasing coverage, as it indicates its ability to pay claims, especially in times of financial strain—like a natural disaster.
What Are Insurance Company Ratings? Why Do They Matter?
Insurance company ratings are holistic scores created by ratings agencies to succinctly describe the financial strength of an insurance company. Financial ratings companies consider a wide variety of factors but look at how well the business is doing financially, how responsibly it is run and external factors like vulnerability to natural disasters. All types of insurance companies receive financial ratings, including auto, home, life and health. And the criteria used may differ based on the exact type of insurance: for example, a homeowners insurance company based in Florida may see its ranking take a hit if the state is hit by a hurricane that causes a lot of damage to houses there; meanwhile, a health insurer could be affected by a nationwide epidemic.
Considering the financial stability of your insurance carrier before you purchase coverage is important because your insurer has an ongoing financial obligation to you. If a restaurant goes out of business, it's a disappointment, but you don't need to consider that possibility when you decide to eat there. With insurance, you're depending on that company to be around to pay a claim should you need them to and that they'll be able to do so in a timely, efficient manner.
What Are Insurance Company Financial Ratings Based On?
The goal of insurance company financial ratings are to evaluate the financial strength of an insurer: how able the company is to withstand a struggling economy, increased claims or other financial hardship. So the ratings are based on a wide array of different criteria relating to financial health. A rating also includes things like the amount of cash the company has in reserve and whether the company has returned a profit in the recent past.
Common insurance rating criteria:
- Amount of cash on hand
- Debt ratio (debt divided by financial assets)
- Diversity of revenue streams
- Risk management protocols
- Quality of insurance policies written (e.g., not all policies are for high-risk people)
Every rating agency has its own methodology (and uses its own rating scale), so ratings will vary somewhat among insurers. However, all ratings companies are basing their decisions on approximately the same data. If an insurer has a drastically different rating from one rating agency to another, you should do further research to determine the cause of the discrepancy.
Companies That Provide Financial Ratings to Insurers
There are many companies and groups that monitor the strength of insurance providers, but the most common ones you'll run into are A.M. Best, Standard & Poor's, Moody's and Demotech. A.M. Best is the most prevalent insurance-specific agency and is the one most commonly used by major insurers. Standard & Poor's and Moody's do not specialize in a specific industry, and are widely used across many types of business worldwide, including insurance.
|Ratings Agency||Industry||Ratings Offered (highest to lowest)|
|A.M. Best||Insurance only||A++, A+, A, A-, B++, B+, B, B-, C++, C+, C, C-, D, E, F|
|Demotech||Insurance only||A'', A', A, S, M, L|
|Standard and Poor's||All industries||AAA, AA+, AA, AA-, A, A+, A, BBB, BB, B, CCC, CC, C, R, SD, D|
|Moody's||All industries||Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C|
|Fitch||All industries||AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D|
Financial Ratings Aren't Infallible
While the ratings provided by ratings agencies can give you a good idea of the financial stability of an insurer, they aren't perfect. For example, Merced Insurance had an A- rating from A.M. Best, but the company went bankrupt in 2018 after the extensive wildfires that occurred in California that year. And S&P, Moody's and Fitch all gave strong ratings to Enron prior to its collapse. So take these ratings with a grain of salt.
Which Insurance Companies Have "A" Ratings?
For the most part, the biggest insurance companies in the United States all have very strong financial ratings. This indicates that ratings agencies have found that the major companies all have sound business models. Companies with the very best ratings include GEICO, State Farm, Mass Mutual and New York Life; they all have the highest possible rating of A++.
We've compared the A.M. Best ratings for several top insurance companies below.
Financial Ratings Comparison of Top Auto and Home Insurance Companies
Financial Ratings Comparison of Top Life Insurance Companies
Financial Ratings Comparison of Top Health Insurance Companies
If your company isn't listed, you can usually also find its financial ratings on its website. However, keep in mind that an insurer may choose to highlight the best scores it has received: If it received an "A" from one ratings agency and a "B" from another, it may opt to only feature only the better score. You may need to check with the ratings company directly to learn how a particular insurer did.
Other Ratings and Reviews to Consider When Choosing an Insurer
An insurance carrier's financial stability is far from the only thing to look at when you're buying insurance. A good starting point for evaluating your insurer's overall quality of service is how many complaints your insurer has received—no company is perfect, but more complaints may be indicative of a company that isn't able to provide an adequate level of service.
The National Association of Insurance Commissioners (NAIC) calculates every insurance company's "complaint index," which is based on how many complaints the company received compared to the amount of insurance it sells. An insurer's complaint index is one of the key metrics we consider when evaluating the best car insurance companies in the country. Some states, including Michigan and Florida, also share this information on a statewide level, so check to see if you can get more local insight.
For a broader look at customer satisfaction, you can also look at ratings done by J.D. Power, a consumer research company. J.D. Power does customer satisfaction ratings across many industries, including vehicles, insurance and appliances. The ratings are only useful as a starting point, however. For the most part, you only have access to how well a company scored in a given area of service, with not much information on what led J.D. Power to reach that conclusion. Additionally, J.D. Power's rankings are completely dependent on consumer reviews. The company doesn't do its own analysis on the quality of the insurers' service.
For reviews (and complaints) from individual customers, you can look to sites like the Better Business Bureau, review websites and even local review sites like Yelp. Keep in mind, though, that customers are more likely to post online if they've had a polarizing experience, whether that's positive or negative. And it's very difficult to arrive at an accurate general picture of the quality of insurer based on individual experiences—one person with a very negative experience is likely to post a scathing review online, but hundreds of people with unremarkable but positive ones may not.