Insurance company ratings explained

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When purchasing an insurance policy, people usually focus on the cost. But there is more to insurance than just the price you pay every term. The position of your insurer in the market, its history of claim payouts, customer satisfaction and industry-wide reputation are some of the often overlooked but necessary details that matter. And the best way to get this information in one place is by perusing insurance company ratings. By taking into account third-party ratings, it is possible to determine the ability of an insurer to pay claims on time and provide the coverage you need in the event of a catastrophe.

What are insurance company ratings?

Consumer analytics companies rate businesses on a variety of factors. Since insurance typically is all about money, the most important criterion for rating insurers is financial stability. People depend on insurance companies to bail them out during a catastrophe. Any policy is purchased with the sole purpose of being covered financially during any disaster that might befall your car, home, or life, and if an insurer does not have a stable position in the industry, its ability to pay out claims becomes questionable.

Although insurance company ratings mainly focus on financial strength, there are other factors that are also taken into consideration. These include overall customer satisfaction, availability, coverage options, discounts and competitive prices. Scores are also based on the resilience of a company in the face of nationwide disasters. For instance, a home insurance company will be rated for how well it handles business during severe weather events like hurricanes, while a health insurance company will be marked for the coverage it offers policyholders during a major case of widespread illness across the country.

What do insurance scores consider

Insurance company ratings take into account a number of factors. Besides the finances, the general health and ethics of the company are also considered before rating the insurer. Some other consideration factors are:

  • Cash in reserve
  • Debt to assets ratio
  • Ethics and risk management
  • Revenue streams
  • Quality of policies underwritten

Since every analytics company is different and follows separate methods to determine scores, the ratings may not always be uniform for all insurers. Besides considering third-party ratings, it is also important that you conduct your own independent research to find your best fit.

Who rates insurance companies

There are four companies whose scores for insurance providers stand out from all others. These are AM Best, Standard & Poor’s, Moody’s and Demotech.

AM Best

The most well-known insurance specific rating company, the scores provided by AM Best are often considered the yardstick for financial strength in the industry. The highest rating offered is A++ (Superior) while the lowest is a D (Poor). AM Best does not rate any other kind of businesses other than insurance companies.

Standard & Poor’s

Unlike A.M. Best, Standard & Poor’s rates businesses across all industries, including insurance. They rate the ability and willingness of companies to meet their financial obligations on time and in full. Or, in other words, they rate the likelihood that an insurance company can and will pay out your claim in a timely manner. The highest score it offers is AAA (Extremely Strong) while the lowest is a D.

Moody’s

Another all-industry rating company, Moody’s Corporation analyzes insurance providers for financial stability, market risk and overall performance. They do this with the intent of determining, like other rating companies, how likely an insurance company is to be able to pay out your claim on time. Their highest score is Aaa (Highest Quality) while C (lowest-rated, typically in default) is the lowest.

Demotech

Ohio-based financial analysis company Demotech rates insurance companies for their survival strength regardless of market downturns. Its rating scale is a little different, in that the highest score offered is A” and the lowest an L, with A’, A, S, M in the middle.

Why are insurance company ratings important?

An insurance company is different from other businesses because it has a financial obligation to customers. Ratings for insurance companies matter because they highlight the financial stability of an insurer and help people gauge if the company will be able to provide them with the money they need in the event of an accident or catastrophe. However, because these ratings are objective and fairly broad, they must not be the only factor to determine the effectiveness of the company. Just because an insurance company is financially strong, it must not be considered a guarantee of excellent customer service too.

What if an insurance company does not have a rating?

Sometimes, an insurance company may be unrated by any of the leading credit-rating agencies. This is not always a negative indicator. In most cases, it simply means that the company is new and has not yet had many years in business or it operates in only a handful of regions and is not considered a national insurer. In the absence of financial ratings, it is best to focus on customer reviews to learn more about the company’s performance.

Other things to consider

While the financial strength of an insurance company is of significance, it is far from the only factor that you should consider when looking for an insurer. In many instances, companies that are financially sound may not be equally reputed when it comes to customer service or timely claim payouts. Therefore, reviewing customer complaints about an insurance company should be your first consideration.

The National Association for Insurance Commissioners (NAIC) maintains an index of complaints against insurance companies, with a median of 1. This index tells you the number of complaints registered against the company by consumers. The higher the score, the greater the number of complaints. You must also check customer reviews about claims handling, billing, renewal, and sudden price hikes by the company. Coverage options and available discounts that help you save a few hundred dollars a year are also necessary factors to be considered when looking for an insurance company.

You may also want to consider researching a company’s J.D. Power score. J.D. Power specializes in data collection and analytics with the intention of providing an unbiased picture of a particular industry. This is important because if you look up customer reviews, many customers will take the time to write a bad review but not focus on the good things about the company. J.D. Power scores major companies in the industry on things like claims handling satisfaction and customer satisfaction. This company’s ratings may give you a good idea of a company’s ability to serve you satisfactorily.

Written by
Cynthia Widmayer
Insurance Contributor
Cynthia Widmayer has over two years of experience as a personal finance writer. She covers home, car and life insurance products for Bankrate, the Simple Dollar, and Coverage.com, among others.
Edited by
Insurance Editor