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  • How do rating agencies rate insurance companies?
  • July 24, 2013
  • Tony Steuer

    By Tony Steuer, CLU, LA

    In order to determine the soundness and creditability of a life insurance company, rating agencies are used to express their own opinion on said company, which is available to the public.

    There are four agencies that can be used, which are A.M. Best, Standard & Poor’s, Fitch and Moody’s.

    As a rule of thumb, only companies who have received one of the top ratings from at least three independent companies should be considered.

    Each rating agency has their own method for determining an insurance company’s rating.

    Areas of consideration may vary, which can include financial leverage, management stability, recent performance, and the overall financial situation of the company. External factors like competition, diversification, and market presence may also be considered.

    The following information summarizes how each rating agency goes about rating an insurance company.

    There are four different rating agencies that rate the creditability of life insurance companies.

    A.M. Best Company

    This agency has the most experience rating insurance companies and has been in business since 1906. Their report is an independent opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations, which is based on a comprehensive evaluation.

    Their report is not a warranty of a company’s financial strength and ability to meet its obligations to policyholders, which is recognized worldwide as the benchmark for assessing and comparing insurers’ financial strength.

    They assign each rated company with a rating on the scale of A++ through D as well as a Financial Size Category (FSC). The FSC provides a convenient indicator of the size of a company in term of its statutory surplus and related accounts.

    You can contact A.M. Best Company by visiting their website or calling their customer support department at (908) 439-2200, ext. 5742. There is no charge for this service, because A.M. Best bills the rated insurance company.

    Standard & Poor’s – Insurer Financial Strength Rating

    This is the current opinion of the financial security characteristics of an insurance company with respect to it ability to pay under its insurance polices and contract in accordance with their terms.

    This opinion is not specific to any particular policy or contract, nor does it address the suitability of a particular policy or contract for a specific purpose or purchaser. It doesn’t take into account deductibles, surrender or cancellation penalties, timeless of payments or fraud claims. For companies with cross boarder or multinational ties, the ratings do not take into account foreign-exchange restrictions.

    Standard & Poor’s does not perform an audit in connection with any rating and may on occasion rely on unaudited financial information.

    For the latest Standard and Poor’s ratings, visit the agency’s website or call them at (212) 438-2400.

    Fitch – Insurer Financial Strength Ratings

    Fitch provides ratings for those insurers who request a rating. Therefore, ratings are not available for all insurance companies. National IFS serve the needs of local insurance markets, which are assigned to an insurer’s policyholder obligations. They are an assessment of relative financial strength.

    They assess the ability of an insurer to meet policyholder and related obligations, relative to the “best” credit risk in a given country across all industries and obligation types.

    For the latest Fitch Ratings, visit the company website or call them at (800) 753-4824.

    Moody’s – Investor’s Services

    Moody’s provide ratings for those insurers who request a rating. Therefore, ratings may not be available for all life insurance companies. Their ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations.

    Specific obligations are considered unrated unless they are individually rated, because the standing of a particular insurance obligation would depend on an assessment of its relative standing under those laws governing both the obligation and the insurance company.

    For the latest Moody’s Rating, visit the company’s website or by calling (212) 553-0377.

About Tony Steuer

Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.

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Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.

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