How to Make Sure Your Insurance Company is Financially Stable
Last Updated on November 18, 2021
Financial strength is important when shopping for car insurance. Unfortunately, many drivers overlook financial strength.
Financial strength is crucial: it could be the difference between a denied and approved claim.
Most of America’s largest insurance companies – GEICO, Nationwide, USAA, and other companies – are in very strong financial positions. They insure trillions of dollars across the United States and around the world.
However, many small and medium-sized insurance companies are less financially stable. They have a regional customer base, for example, or only a fraction of the business that a larger insurance company has.
Want to check the financial strength of an insurance company? Keep reading to discover how.
How to Assess the Financial Strength of an Insurance Company
Five independent agencies rate the financial strength of insurance companies, including A.M. Best, Fitch Ratings, Moody’s Investor Services, Standard & Poor’s Insurance Ratings Services, and Demotech.
Each organization has a different rating system. They also analyze the financial strength of insurance companies in different ways. Most of these organizations, however, perform a detailed audit of the company. They analyze every detail of the insurance company’s business, including its liabilities and assets. Based on that analysis, the organization assigns a rating.
You can find all five organizations online. All five publish their insurance company ratings for free, although you have to register (for free) to use Moody’s Investor Services and Standard & Poor’s Insurance Ratings Services:
A.M. Best Company, Inc: www.ambest.com
Fitch Ratings: www.fitchibca.com
Kroll Bond Rating Agency (KBRA): www.kbra.com
Moody’s Investor Services: www.moodys.com
Standard & Poor’s Insurance Ratings Services: www.standardandpoors.com
Search for Financial Strength Ratings Online
You could check each individual website for car insurance financial strength ratings. However, it’s better to just search online for these ratings.
Type “GEICO AM Best” into Google, for example, and you should see a press release that instantly lists GEICO’s rating from A.M. Best.
A.M. Best and most other rating organizations publish press releases when they change a rating or affirm an existing rating. With a few seconds of searching, you can find that press release and view the financial strength of your company.
How to Check A.M. Best Financial Ratings
The five organizations listed above assess the financial strength of insurance companies. However, A.M. Best tends to be the best-known assessment organization.
A.M. Best analyzes insurance companies, then provides four types of credit ratings, including:
- Best’s Financial Strength Rating (FSR)
- Best’s Issuer Credit Rating (ICR)
- Best’s Issue Ratings (IR)
- Best’s National Scale Rating (NSR)
When analyzing the financial strength of car insurance companies, you should use the Financial Strength Rating (FSR), which provides instant data on an insurer’s ability to cover its debts.
After assessing an organization, A.M. Best rates the organization’s financial strength based on a grade scale from D to A++. Just like in school, a higher grade is better.
Here’s how the A.M. Best grade scale works:
- Superior (A++)
- Superior (A+)
- Excellent (A)
- Excellent (A-)
- Good (B++)
- Good (B+)
- Fair (B)
- Fair (B-)
- Marginal (C++)
- Marginal (C+)
- Weak (C)
- Weak (C-)
- Poor (D)
Most of America’s largest insurance companies are rated Excellent (A-) or higher. The best insurance companies have an A+ rating, and a rare few even have an A++ rating.
A.M. Best also has four other ratings for companies that don’t fit into the grades above:
E: The insurance company has been publicly placed via court order into conservation or rehabilitation, which means it is currently limiting or delaying policyholder payments, most likely because it is nearing bankruptcy.
F: The insurance company has been publicly placed via court order into liquidation after a finding of insolvency, which means the insurer is effectively bankrupt.
S: The insurance company has suspended its financial strength rating because of sudden and significant events that have impacted operations.
NR: The insurance company is not rated. The insurer may have been previously rated by A.M. Best, or the insurer may have never been rated.
Checking Other Financial Strength Ratings
A.M. Best and the other four companies listed above all publish financial strength ratings online. Check the website, then search for an insurance company for more information.
Fitch, for example, provides an Insurer Financial Strength (IFS) rating. You can find insurance ratings at www.fitchratings.com. The organization specializes in analyzing life and health insurance companies, covering approximately 85% of the life and health insurance industry.
Demotech, meanwhile, has been providing Financial Stability Ratings (FSRs) since 1985. The company specializes in analyzing insurance companies based on their financial stability instead of their financial size. You can find the FSRs of insurance companies by visiting www.demotech.com
Moody’s Investor Services assigns Financial Strength Ratings (FSRs). These FSRs measure the insurer’s ability to meet policyholder obligations and claims. You can view the latest Moody’s ratings at www.moodys.com
Standard and Poor’s Corporation publishes its Security Circle and Financial Enhancement Ratings for insurance companies. However, Standard and Poor may not perform an audit with their rating, and they base their rating on information provided by the insurer. You can view the latest Standard and Poor’s ratings at www.standardandpoors.com
Why Financial Strength Matters
Just like with banks, people assume their insurance companies are solid businesses. However, banks and insurance companies can fail – and they do fail.
If a bank has too many bad loans, for example, or has too many loans in an area with a bad economy, then the bank could fail.
Similarly, an insurance company could fail after multiple disasters in a specific region. If 90% of an insurance company’s customer base is in Houston, for example, and a hurricane hits Houston and causes billions of dollars of damage, then the insurance company may not be able to cover all of the losses.
In other words, you can’t assume your insurance company is always going to be there for you. You might go to make a claim and have that claim denied or delayed. A denied, reduced, or delayed claim is a sign that your insurer is nearing bankruptcy.
If an insurer ultimately does declare bankruptcy, then you may never be paid for your insurance claim. With bankruptcy, the organization’s assets are sold, with proceeds going towards creditors (the people who are owed money – including policyholders like you).
Insurance companies can and do fail. By assessing the financial strength of an insurer, you can protect yourself from losses.
You don’t want your insurer to go bankrupt before you can make a claim.
Check your insurer’s A.M. Best rating – or its financial strength rating from any other organization – before buying a policy.