When selecting an insurance carrier, what is most important? Coverages? Price? A trustworthy recommendation? While all valuable, one factor outweighs them all: the insurance provider’s rating. All insurers are not created equal. Ratings provide valuable information on an insurance company’s financial ability to cover its claims. Are your insurance providers making the grade? If not, you could be left holding the bill when a loss occurs.

What is an Insurance Rating?

Insurance companies are assigned ratings from independent third parties. These rating agencies evaluate how well-funded an insurer is, the level of risk it carries, and its overall operating performance. They also factor in the company’s business profile, management style, and competitors. The formula assesses the company’s financial strength and ability to meet contractual obligations.

While many rating agencies exist, AM Best is considered the gold standard for its longevity, objectivity, and specialty in the insurance industry. Just like a report card, it rates companies from A++ to F. The higher the rating, the more likely the insurer can pay out on its policies, because the letter score is a rating of the financial strength of the insurance company.

Ratings from A++ to B+ fall within the secure category and go to companies with a high likelihood of meeting their insurance obligations. B through C- indicate companies vulnerable to changes in underwriting and economic conditions. Ratings D and E are companies likely to default, under significant regulatory supervision, or placed in liquidation.

AM Best also assigns a numeric rating, in the form of a Roman numeral, that rates the financial size category of the insurance company. Numerals are assigned from I (less than $1 million) up to XV (more than $2 trillion).

Most companies, including yours, will have minimum acceptable ratings, for example A- VIII.

AM Best is not the only rating agency, of course. You can and often should consult other rating agencies, such as Moody’s, Fitch Ratings, and even Standard & Poors.

How do Insurance Companies Manage Their Ratings?

Ratings translate to consumer and investor confidence in an insurance company. A downgrade could impede new business growth and profitability, so insurers monitor ratings closely. Many factors can create lower insurance ratings, but common reasons include:

A change in the insurance marketplace. This exists now as insurers have increased pressure from state governments to pay business interruption claims for COVID-19.
Structure or management changes within the company. Turnover at the top can cause worry and instability.
A large number of claims paid. Consider that 2017’s Hurricane Maria caused more than $32 billion in insured claims.
A reduction in the company’s financial reserves. This primarily is driven by the performance of the investment market.

What Happens When an Insurance Company Fails?

Banks have the Federal Deposit Insurance Corporation (FDIC). Investment firms have the Securities Investor Protection Corporation (SIPC). Insurance companies fall to the states. Regulators monitor the financial health of the insurance companies licensed in their state. A state’s guarantee fund protects policyholders. However, policies are subject to each state’s coverage limitations. Guarantee funds also lack prefunded reserves. Losses get divided among other insurance providers within the state. While the system historically has worked, large-scale losses could require other interventions for solvency.

My Company Works with a Highly Rated Insurance Provider. We’re Covered, Right?

Not necessarily. If your company works with third-party vendors and subcontractors, the ratings of their insurers are just as important as your own. When a subcontractor causes a loss and is insured by a lower-rated company unable to pay the claim, the bill flows upstream. This could result in out-of-pocket costs and increased premiums for your company. Best practice is checking the rating of the company issuing the certificate of insurance (COI) and not accepting any insurer rated lower than A-. You will also want to make sure the issuing company matches the financial size rating you require (the Roman numeral in an AM Best score).

When working with multiple third parties, monitoring insurance ratings is time-consuming and difficult. illumend, from myCOI checks ratings as part of our automated certificate of insurance tracking and management process. Our software verifies every vendor’s insurance is active and backed by a financially stable company. When lower ratings pop up, the software issues an alert so your company can take action. illumend, from myCOI keeps companies protected and erases the worry of risk management. Learn more about our best-in-class platform with a product demo and let us help make sure your loss prevention process gets an A+.