An insurance company credit rating is the opinion of an independent agency regarding the company's financial strength and ability to pay policyholders’ claims. It doesn't indicate how well the insurance company’s securities are performing forinvestors. In addition, an insurance company’s credit rating is considered an opinion, not a fact, and ratings of the same insurance company can differ among rating agencies.
Key Takeaways
- An insurance company credit rating indicates an insurance company's solvency, financial strength, and ability to pay policyholder claims.
- An insurance company credit rating is considered an opinion (not a fact) issued by an independent agency.
- Because each independent rating agency has its own rating scale, the same insurance company can receive different ratings among the various agencies.
- The four major insurance company rating agencies in the U.S. are A.M. Best, Moody's, Standard & Poor's, and Fitch.
Understanding Insurance Company Credit Ratings
There are four major insurance company rating agencies: Moody’s, A.M. Best, Fitch, and Standard & Poor’s (all but A.M. Best also provide corporate credit ratings for investors). Each agency has its own rating scale that doesn’t necessarily equate to another company’s rating scale, even when the ratings appear similar.
For example, A.M. Best’s highest insurance company credit rating is A++, meaning superior, while Fitch’s is AAA for exceptionally strong, Moody’s is Aaa for the highest quality, and Standard & Poor’s is AAA for extremely strong. It is important not to confuse, for example, A.M. Best’s second-best rating of A+ (for superior) with Fitch’s fifth-best rating of A+ (for strong), or A.M. Best’s C rating (for weak) with Moody’s C (for lowest rated).
Special Considerations
An entity that appears to be a single, major insurance company may be composed of several smaller insurance companies, each with its own insurance company credit rating. For example, MetLife, Inc., has a number of subsidiaries, including American Life Insurance Company, Metropolitan Tower Life Insurance Company, and Delaware American Life Insurance Company. Each subsidiary will have its own insurance company credit rating based on how the rating agency in question views that company's financial strength.
What's more, these ratings differ from the parent company’s corporate credit ratings, which can include separate ratings for preferred stock and senior unsecured debt.
Benefits of Insurance Company Credit Ratings
Insurance company credit ratings are important because many people and businesses depend on insurance companies to pay claimswhen they suffer an insured loss. Insured risks are usually those that would cause a large financial loss if not insured. However,insurance companiescan only payif they have the money. Like other businesses, insurance companies canbecome insolvent.
Additionally, many people and businesses depend on insurance companies to pay for legal services, such as defendingagainst a lawsuit. Few people can afford the exorbitant costs of today's litigations. Without money for defense, they could be held unjustly liable for an occurrence. To prevent these tragedies, people and businesses purchase insurance. Insurance company credit rating agencies seek to prevent insurance company insolvencyby issuinginsurer financial strength ratings(IFSratings) that are freely available for public inspection.
Why should consumers check an insurance company's credit ratings?
They tell consumers whether or not an insurer can be expected to pay claims. People and businesses depend on insurance companies to pay claimswhen they suffer an insured loss. Insurance company credit rating agencies seek to prevent insurance company insolvencyby issuinginsurer financial strength ratings(IFSratings) that are freely available for public inspection.
Which are the four major credit rating agencies?
Moody’s, A.M. Best, Fitch, and Standard & Poor’s are the best-known ratings agencies (all except A.M. Best also provide corporate credit ratings for investors). Each agency has its own rating scale that doesn’t necessarily equate to another company’s rating scale, even when the ratings appear similar.
FAQs
An insurance company credit rating indicates an insurance company's solvency, financial strength, and ability to pay policyholder claims. An insurance company credit rating is considered an opinion (not a fact) issued by an independent agency.
What is the rating system for insurance companies? ›
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).
What is credit rating with example? ›
A credit rating is an opinion of a particular credit agency regarding the ability and willingness an entity (government, business, or individual) to fulfill its financial obligations in completeness and within the established due dates. A credit rating also signifies the likelihood a debtor will default.
How do I check the rating of an insurance company? ›
How to check an insurer's financial strength
- A.M. Best Company.
- Demotech.
- Fitch Ratings.
- Moody's Investor Service.
- Standard and Poor's Corporation.
In property and casualty insurance, there are three basic rate-making methods:
- Judgment Rating is used when the factors that determine potential losses are varied and cannot easily be quantified. ...
- The second rate making method is class rating, or manual rating. ...
- The third rate making method is merit rating.
Generally, five different factors are used to determine your credit-based insurance score: payment history, outstanding debt, credit history length, pursuit of new credit and credit mix. You can improve your credit-based insurance score. Make payments on time.
What are the four main insurance rating companies? ›
Financial Planning
Five independent agencies—A.M. Best, Fitch, Kroll Bond Rating Agency (KBRA), Moody's and Standard & Poor's—rate the financial strength of insurance companies.
What is a rating methodology in insurance? ›
Rating methodology refers to the method used by an underwriter when calculating premiums.
What are insurance rating factors? ›
A rating factor is an individual characteristic of a customer used to price car insurance premiums. Common rating factors include age, location, driving history, credit score, and more.
What are the 5 C's of credit rating? ›
The 5 Cs of Credit analysis are – Character, Capacity, Capital, Collateral, and Conditions. They are used by lenders to evaluate a borrower's creditworthiness and include factors such as the borrower's reputation, income, assets, collateral, and the economic conditions impacting repayment.
Here's what to know about each of them, and how heavily they are weighted into your score.
- Your payment history (35 percent) ...
- Amounts owed (30 percent) ...
- Length of your credit history (15 percent) ...
- Your credit mix (10 percent) ...
- Any new credit (10 percent)
Insurance companies are subject to ratings that attempt to determine how financially stable they are. The most prominent ratings agency for insurance companies is AM Best, but the big credit agencies all look at insurance companies, too.
Who are the best rated insurance companies? ›
Nationwide: Best Full-Coverage Car Insurance. State Farm: Best Car Insurance Customer Service. Liberty Mutual: Best Car Insurance for Young Drivers. Allstate: Best Industry Reputation.
What is insurance rating classification? ›
A rating class is a risk category assigned by life insurance companies during the life insurance underwriting guidelines. Life insurance rates are driven by the rating class assigned. Standard ratings classes will be something like Preferred Plus, Preferred, Standard Plus, Standard, and Substandard.
Is B+ a good rating for an insurance company? ›
If a company is considered secure, it will receive ratings of A++ or A+ (superior), A or A- (excellent) or B++ or B+ (good).
Does Moody's rate insurance companies? ›
Moody's is a ratings agency that provides opinions of the relative strength or weakness of insurance companies. Specifically, they summarize the likelihood that a company will be able to meet its senior policyholder obligations.
What is the credit limit for insurance? ›
3.11 Granted Credit Limit Is the maximum amount insured by the Company on an approved buyer and is set at the maximum amount that can be owed by the buyer to the insured at any time during the policy period. 3.12 Insurable Turnover The total invoice value of sales made to approved buyers during the policy period.
What is the highest rating for an insurance company? ›
AM Best rating scale for financial strength
| Rating symbol | Rating notches | Category |
|---|
| A+ | + | Superior |
| A | – | Excellent |
| B+ | + | Good |
| B | – | Fair |
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